Marvel Company Is Considering the Acquisition of Two Machines Assume Straight-Line Depreciation

question 99

Essay

Marvel Company is considering the acquisition of two machines.
$\begin{array}{lll}&\text { Machine A }&\text { Machine B }\\\text { Initial investment } & \$ 200,000 & \$ 200,000 \\\text { Annual operating revenues (end of year) } & \$ 100,000 & \$ 160,000 \\\text { Annual expenses (end of year) } & \$ 25,000 & \$ 85,000 \\\text { Terminal salvage value } & \$ 10,000 & \$ 20,000 \\\text { Estimated useful life } & 5 \text { years } & 5 \text { years }\\\text { Minimum desired rate of return }&14\%&14\%\end{array}$
Assume straight-line depreciation.Ignore income taxes.The present value of an ordinary annuity of one at 14% and 5 periods is 3.4331.The present value of one at 14% and 5 periods is 0.5194.
Required:
A) Calculate the net present value for both machines.
B) Assume there are enough funds to purchase both machines. Should both machines be purchased?
C) Assume there are funds to purchase only one machine. Which machine should be purchased?

• A) Calculate the net present value for both machines.
• B) Assume there are enough funds to purchase both machines. Should both machines be purchased?
• C) Assume there are funds to purchase only one machine. Which machine should be purchased?

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