Asked by Mayesha Tanjeen on Jul 12, 2024
Verified
In comparing these two alternatives, which is the correct evaluation
A) Machine B should be purchased as the net present value of the costs of this alternative is the highest.
B) Machine B should be purchased as the net present value of the costs of this alternative is the lowest.
C) Machine A should be purchased as the net present value of the costs of this alternative is the lowest.
D) Machine A should be purchased as the net present value of the costs of this alternative is the highest.
Incremental Cost Approach
A decision-making process focusing on the costs that change with the level of production or the introduction of a new process.
Net Present Value
The difference between the present value of an investment project’s cash inflows and the present value of its cash outflows.
Discount Rate
The discount rate employed in the evaluation of discounted cash flow (DCF) to ascertain the current worth of prospective cash flows.
- Apply net present value (NPV) and internal rate of return (IRR) methods to evaluate investment opportunities.
- Perform incremental cost analysis to compare alternative investment options.
Verified Answer
SS
Saraj SidhuJul 18, 2024
Final Answer :
B
Explanation :
Machine B should be chosen because it has lower annual operating costs and a higher salvage value, despite having higher overhaul costs in year 4. These factors contribute to a lower net present value of costs when discounted at 10%, making it the more cost-effective option over the 8-year period.
Learning Objectives
- Apply net present value (NPV) and internal rate of return (IRR) methods to evaluate investment opportunities.
- Perform incremental cost analysis to compare alternative investment options.