Cubbies Pty Ltd is considering the purchase of a new machine to replace an old machine. Selected cost data pertaining to the two machines is provided below.
At the end of four years, the company plans to discontinue the product line for which the machines are used. Income taxes can be ignored. Calculate the net present value of the new machine, if Cubbies Pty Ltd's hurdle rate is 14 per cent.

A) ($903)
B) ($4097)
C) ($87)
D) ($2913)

Question

Cubbies Pty Ltd is considering the purchase of a new machine to replace an old machine. Selected cost data pertaining to the two machines is provided below.

At the end of four years, the company plans to discontinue the product line for which the machines are used. Income taxes can be ignored. Calculate the net present value of the new machine, if Cubbies Pty Ltd's hurdle rate is 14 per cent.

A) ($903)
B) ($4097)
C) ($87)
D) ($2913)

Xavier Chinn · Accepted Answer

Final Answer : A, Explanation :  To calculate the net present value, we need to discount the future cash flows of each machine back to their present value using the hurdle rate of 14%.For the old machine:NPV = -21,000 + (8,000/1.14) + (8,000/(1.14^2)) + (8,000/(1.14^3)) + (1,000/(1.14^4))= -$15,808.60For the new machine:NPV = -31,000 + (10,000/1.14) + (10,000/(1.14^2)) + (10,000/(1.14^3)) + (12,000/(1.14^4))= -$16,711.68Since the net present value of the new machine is higher than that of the old machine, Cubbies Pty Ltd should choose to purchase the new machine. However, neither option has a positive NPV, so it may be worth considering other alternatives or negotiating a better price.

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