Two machines -Machine M and Machine P- are being considered in a replacement decision. Both machines have about the same purchase price and an estimated ten year life. The company used a 12 percent minimum rate of return as its acceptance- rejection standard. Following are the estimated net cash inflows for each machine.
Year Machine M Machine P
1 $ 12,000 $ 17,500
2 12,000 17,500
3 14,000 17,500
4 19,000 17,500
5 20,000 17,500
6 22,000 17,500
7 23,000 17,500
8 24,000 17,500
9 25,000 17,500
10 20,000 17,500
Residual Value 14,000 12,000
1. Compute the present value of future cash flows for each machine, using tables 1 and 2 in the appendix on present value tables.
2. Which machine should the company purchase, assuming that both involve the same capital investment?