thecontemptibles
New member
John Doe has been asked to evaluate two machines. After some investigation, he determines that they have the costs shown in the following table. He is told to assume that:
a) the life of each machine is three years old
b)the company thinks it knows how to make 12% on investments no more risky than this one.
Machine A
Original cost: $10,000
Labor per year: 2,000
Maintenance per year: 4,000
Salvage value: 2,000
Machine B
Original cost: $20,000
Labor per year: 4,000
Maintenance per year: 1,000
Salvage value: 7,000
Determine, via the present value method, which machine John should recommend.
OK I am confused about the salvage value. Should that be a part of the NPV formula, or should that simply be added to the NPV that is obtained after doing the math for each annual cost?
Also, when comparing the NPVs of both machines, is the better investment the number that is greater, considering the values are negative?
Any help is much appreciated, thank you.
a) the life of each machine is three years old
b)the company thinks it knows how to make 12% on investments no more risky than this one.
Machine A
Original cost: $10,000
Labor per year: 2,000
Maintenance per year: 4,000
Salvage value: 2,000
Machine B
Original cost: $20,000
Labor per year: 4,000
Maintenance per year: 1,000
Salvage value: 7,000
Determine, via the present value method, which machine John should recommend.
OK I am confused about the salvage value. Should that be a part of the NPV formula, or should that simply be added to the NPV that is obtained after doing the math for each annual cost?
Also, when comparing the NPVs of both machines, is the better investment the number that is greater, considering the values are negative?
Any help is much appreciated, thank you.