HW Assignment 10      Chapter 13

13-7  A:  0  1  2  3  4  5  6  7  8

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 -10  4  4  4  4  4.2  4.2  4.2  4.2

         -12

           -8

 
Since Machine A’s renewal investment and cash flows change the EAA method cannot be used, so the replacement chain method must be used. Machine A’s simple NPV is calculated as follows: Enter CF₀ = -10 and CF_1-4 = 4. Then enter I/YR = 10, and press the NPV key to get NPV_A = $2.679 million. However, this does not consider the fact that the project can be repeated again. Enter these values into the cash flow register: CF₀ = -10; CF_1-3 = 4; CF₄ = -8; CF_5-8 = 4.2. Then enter I/YR = 10, and press the NPV key to get extended NPV_A = $3.58 million.
 
B:  0  1  2  3  4  5  6  7  8
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 -15  3.5  3.5  3.5  3.5  3.5  3.5  3.5  3.5

 
Enter these cash flows into the cash flow register, along with the interest rate, and press the NPV key to get NPV_B = $3.672 » $3.67 million.
 
Machine B is the better project and will increase the company's value by $3.67 million, rather than the $3.58 million created by Machine A.
 

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