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HI FRIENDS,

I am very much confused about thisquestion, can anyone try to solve this question

A company  has to make choice between buying of two machines.machine A would cost Rs1,00,000 and require cash running expenses of Rs32,000 pa. Machine B would cost Rs1,50,000 and its cash running expenses would amount to Rs20,000 pa.Both the machine have a life of 10Year with zero salvage value.the company follows straight line method of depreciation and is subject to 50% tax on its income.The company`s required rate of returnis 10% which machine should it buy.NOTE:present value of Re1 per annum for 10%discount rate is 6.1446

Replies (6)

machine B should be purchased Becoze It's NPV is lower then machina A.

 

Particulars                                                                                      A                          B          
 
1)Purchase Cost                                                    100000             150000
2)Running Cost Of Machines                                    32000               20000
3)Cumulative Present Value @ 10% for 10 yrs       6.1446               6.1446
4)Present Value of Running Cost of Machine(2*3) 196627              122892
5)Cash Flow of Machines (1+4)                              296627              272892
6)Equivalent P.V of annual Cash outflow (5/3)        48274                 44412
 
Machine B Should be selected since its equivalent cash outflow is less than Machine A
 

machine B should be selected 

 

Machine A Machine B
Cash outflow at the beginning of year one 100000 150000
Annual Cashflow 32000 20000
Tax saving due to depreciation 5000 7500
PVAF 6.1446 6.1446
Present Value of cash outflows((b-c)*d) 165904.2 76807.5
Net cash Outflow 265904.2 226807.5
 

Therefore machine B should be selected

AGREE WITH POONAM

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