Mars Corp Is Choosing Between Two Different Capital Investment Proposals

question 95

Multiple Choice

Mars Corp. is choosing between two different capital investment proposals. Machine A has a useful life of 4 years, and Machine B has a useful life of 6 years. Each proposal requires an initial investment of $200,000, and the company desires a rate of return of 10%. Although Machine B has a useful life of 6 years, it could be sold at the end of 4 years for $35,000. $\begin{array}{|l|l|}\hline \begin{array}{l}\text { Present Value } \\\text { of } \$ 1 \text { at } 10 \%\end{array} & \text { Year } \\\hline 0.909 & 1 \\\hline 0.826 & 2 \\\hline 0.751 & 3 \\\hline 0.683 & 4 \\\hline 0.621 & 5 \\\hline 0.513 & 6 \\\hline\end{array}$ Machine A will generate net cash flow of $70,000 in each of the four years. Machine B will generate $80,000 in year 1, $70,000 in year 2, $60,000 in year 3, and $40,000 per year for the remaining 3 years of its useful life.
Which of the following statements portrays the most accurate analysis between the two proposals?

• A) Mars should invest in Machine A because the net present value of Machine A after 4 years is higher than the net present value of Machine B after 4 years.
• B) Mars should invest in Machine B because the net present value of Machine A after 4 years is lower and the net present value of Machine B after 6 years.
• C) Mars should invest in Machine B because the net present value of Machine A after 4 years is lower than the net present value of Machine B after 4 years.
• D) Mars should invest in Machine A because the net present value of Machine A after 4 years is higher than the net present value of Machine B after 6 years.

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Definitions:

Receivables Financing

A form of financing where a company uses its accounts receivable as collateral to secure funding from a financial institution.

Maturity Date

The specific date on which a financial instrument (like a bond or loan) becomes due for payment of principal and interest.

Installment Accounts

Installment accounts are credit accounts where the borrower repays the loan amount plus interest in regular payments over a set period.

Allowance Method

The allowance method is an accounting technique used to account for bad debts by estimating uncollectible accounts and reflecting them as an allowance for doubtful accounts on the balance sheet.