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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