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Capital Budgeting

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

Solution Preview

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

Solution Summary

This solution is comprised of a detailed calculation to consider the purchase of machine tool automation system.