Value of Money for This Professional Writing

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It is worth noting that after three years, another machine will need to be purchased. This cost should be included (i.e. The costs for years 4 and 5) in order to adequately assess the full cost difference between the two machines. After three years, Machine 2 still has a worse NPV than does Machine a, which implies to that point that Machine a is still better. The future decision after Year 3, because it is unknown at this point, cannot be included in the calculation.

b) NPV analysis supports the answer to question a. Indeed, NPV analysis is how the answer to question a was derived. With an interest rate to work with, NPV is the most appropriate means of determining the value of each of these projects, so it is what was used. Any other method of calculating question a would be inferior, so would not make sense.

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11. For Kerry's purposes, current costs and sunk costs are not included in the NPV calculation. Thus, the $6,000 marketing expense is not included; nor is the $18,000 in taxes and insurance. Income tax will only be considered on the incremental cash flows from the project. Thus, the most Kerry will pay for this machine is the net present value of the machine. This should be calculated on Excel using Solver, to have an NPV of 0. The reason this is the best method is because the purchase cost impacts the tax expense, as a result of the depreciation tax credit. That means that six total elements of the equation are unknown, but all are related to the original purchase cost.

The maximum that Kerry would purchase the machine for, therefore, would be $46,277. If the machine cost more, the net present value would.....

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