Capital Budgeting
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Your firm is considering the purchase of a machine tool automation system. Which of the following should you choose if your cost of capital is 15%? The life of both alternatives is 5 years. Why?
Acme Machine: Cost = $55,000
Maintenance Contract: $12000 annually
Baker Machine: Cost $39,000
Maintenance Contract: $21,000 annually
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Solution Summary
This solution is comprised of a detailed calculation to consider the purchase of machine tool automation system.
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We must find the NPV for both machines. NPV is calculated by finding the present value of each cash flow, including both cash inflows and outflows, discounted at the project's required rate of return.
Acme Machine
NPV = sum of CFt where CF is the cash flow
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