Saxon Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows:
End of Year. Machine A B
1 $5,000 $1,000
2 4,000 2,000
3 2,000 11,000
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?
- Only Machine A is acceptable.
- Only Machine B is acceptable.
Both machines are acceptable, but A should be selected because it has the greater net present value.
Both machines are acceptable, but B should be selected because it has the greater net present value.
- Neither machine is acceptable.