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NEW QUESTION: 1
NEW QUESTION: 2
Phoenix Products Inc. requires a new machine to produce a part for a solar air conditioner. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines.
Cash flow analysis indicates the following:
Year Machine A Machine B
If the cost of capital for Phoenix Products is 5 percent, which of the following is the most valid statement?
A. The IRR(A) < IRR(B), therefore accept Machine B.
B. The NPV(A) > NPV(B), therefore accept Machine A.
C. The NPV(A) < NPV(B), therefore accept Machine B.
D. The IRR(A) > IRR(B), therefore accept Machine A.
E. Take neither A nor B since the cost of capital is greater than the internal rate of return.
NPV(A) = $1,938(PVIF(5%,4)) - $1,000
= $1,938(0.8227) - $1,000 = $1,594.39 - $1,000 = $594.39.
NPV(B0 = $417(PVIFA(5%,4)) - $1,000
= $417(3.5460) - $1,000 = $1,478.68 - $1,000 = $478.68.
Therefore, accept Machine A since NPV(A) > NPV(B).
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