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 | $ |