Two devices (A and B) are available to
perform a necessary manufacturing operation for 3 years. The
initial costs are Mu 90,000 and Mu 145,000 respectively. The
net annual cash flows are given below. If the cost of capital
is 8 %, decide which device is to preferred.
| Device |
End
of Year Cash flows |
| 1 |
2 |
3 |
| A |
45,000 |
45,000 |
45,000 |
| B |
60,000 |
60,000 |
80,000 |
NPV (Device A) = -90,000 + 45,000 (P/A, 8 %,
3)
= -90,000+ 45,000 (2.5771)
= Mu 25, 970
NPV (Device B) = -145,000 + 60,000(P/A, 8%,2) + 80,000(P/F,
8%,3)
= -145,000+ 60,000(1.7832)+80,000(0.7938)
= MU 25,500
Based on the NPV, we should prefer Device A since NPV (Device
A) is higher than NPV (Device B). |
|
