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Making Investment Decisions with NPV

The Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following costs:

Year Machine A Machine B
0 $40,000 $50,000
1 10,000 8,000
2 10,000 8,000
3 10,000 + replace 8,000
4 ------ 8,000 + replace

These costs are expressed in real terms.

a. Suppose you are Borstal's financial manager. If you had to buy one or the other machine and rent it to the production manager for that machine's economic life, what annual rental payment would you have to charge? Assume a 6% real discount rate and ignore taxes.
b. Which machine should Borstal buy?

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a. Suppose you are Borstal's financial manager. If you had to buy one or the other ...

Solution Summary

The solution helps in capital budgeting Investment Decisions with NPV.Borstal's financial managers are examined.

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