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- Topic: basic question 42 under capital budgeting

Author | Topic: basic question 42 under capital budgeting |
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chandsingh@2015-02-20 14:25:14 |
Hi, if any one can share their thoughts on this it would be appreciatd. The questions asks us to select between two machine investments with different costs and maintenance. one machine (A) cosst 150 and costs 80 to operate for 5 years, the second machine (B) costs 250 and costs 60 to operate for 7 years. the PV of A = -453.26 and the PV of B = -542.10. i got those figures but then i thought since machine A can only last for 5 years, where as machine B can last for 7 years, the above calculations may not be acurate since machine A would have to be replaced in year 6 and 7 to match up with Machine B. So if you added purchase cosst and operation costs for year 6 and 7 , machine B would be the better option? should nt the capital budgeting decision take into account additional tenure on machines? |

Alicechau@2015-03-22 11:06:22 |
There should be cash inflows for these investments (that's what I'm used to seeing) the equation accounts for the life of each asset in the discount rate/interest. This is a mutually exclusive problem so pick the one with the highest net present value. Hope this helped. |