Saxon Manufacturing Is Considering Purchasing Two Machines

question 9

Multiple Choice

Saxon Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: Saxon Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Saxon purchase?

• A) Only Machine A is acceptable.
• B) Only Machine B is acceptable.
• C) Both machines are acceptable, but A should be selected because it has the greater net present value.
• D) Both machines are acceptable, but B should be selected because it has the greater net present value.
• E) Neither machine is acceptable.

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Definitions:

Premium

The amount by which the price of a financial asset exceeds its par or face value, or alternatively, the cost above the normal price paid to acquire an insurance policy.

Put Option

A financial contract giving the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a predetermined price within a set time frame.

Put Premium

The cost associated with acquiring a put option, allowing the holder to sell an asset at a stipulated price within a specific timeframe, offering protection against asset depreciation.

Put Options

Financial contracts granting the holder the right to sell an asset at a predetermined price before a specified date.