Consider a machine that costs $20 000,has an estimated useful life of five years with cash flows of $10 000 p.a.and a cost of capital of 10% p.a.A company is considering whether the machine should be replaced every one,two,three,four or five years.The net present value (assuming constant chain of replacement)under each alternative is given as follows:
NPV(1)= $20 000
NPV(2)= $29 000
NPV(3)= $35 000
NPV(4)= $25 000
NPV(5)= $19 000
What is the appropriate action for the firm?
A)Go ahead with the project.
B)Do not go ahead with the project.
C)Go ahead with the project and replace the machine every five years.
D)Go ahead with the project and replace the machine every three years.

Question

Quizplus · Accepted Answer

The best choice for the firm is to go ahead with the project and replace the machine every three years because it has the highest net present value of $35,000. This means that replacing the machine every three years will provide the highest value to the firm in the long run compared to other options, and the cost of capital is also taken into account.

Consider a Machine That Costs $20 000,has an Estimated Useful