Present Value Computations
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 uses a 12 percent minimum rate of return as its acceptance-rejection standard. The estimated net cash inflows for each machine follow.
| 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 Table 1 and Table 2.
|
Total Present Value |
| Machine M |
$ |
| Machine P |
$
|