Reference no: EM131696283

Question - Two machines -Machine M and Machine P- are being considered in a replacement decision. Both machines have about the same purchase price and an estimated ten year life. The company used a 12 percent minimum rate of return as its acceptance- rejection standard. Following are the estimated net cash inflows for each machine.

Year       Machine M         Machine P

1              $ 12,000                $ 17,500

2              12,000                   17,500

3              14,000                   17,500

4              19,000                   17,500

5              20,000                   17,500

6              22,000                   17,500

7              23,000                   17,500

8              24,000                   17,500

9              25,000                   17,500

10           20,000                   17,500

Residual Value 14,000           12,000

1. Compute the present value of future cash flows for each machine, using tables 1 and 2 in the appendix on present value tables.

2. Which machine should the company purchase, assuming that both involve the same capital investment?