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# Capital Budgeting

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Johnson Jets is considering two mutually exclusive machines. Machine A has an up-front cost of \$100,000 (CF0 = -100,000) and produces positive after-tax cash inflows of \$40,000 a year at the end of each of the next six years.

Machine B has an up-front cost of \$50,000(CF0 = -50,000) and produces after-tax cash inflows of \$30,000 a year at the end of the next three years. After three years, Machine B can be replaced at a cost of \$55,000 (paid at t = 3). The replacement machine will produce after-tax cash inflows of \$32,000 a year for three years (inflows received at t = 4, 5, and 6).

The company's cost of capital is 10.5 percent. What is the net present value (on a 6-year extended basis) of the most profitable machine?

A.\$23,950

B.\$41,656

C.\$56,238

D.\$62,456

E. \$71,687

#### Solution Preview

We find the NPV of both the options.
Option 1 the cash flows are
Year 0 1 2 3 4 5 ...

#### Solution Summary

The solution explains the calculation of Net Present Value given the cash flows

\$2.19