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The U.S. Postal Service is looking for a new machine to help sort the mail. Two companies have submitted bids to Cliff Kraven, the postal inspector responsible for choosing a machine. A cash flow analysis of the two machines indicates the following:
It the cost of capital for the Postal Service is 8%. which of the two mail sorters should Cliff choose and why?
Suggested Answer: A
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The NPV of both machines must be calculated and compared to determine which will yield a better return of cash flows. Machine A is calculated as one lump sum payable in 4 years minus the initial investment cost.
The NPV of Machine B is calculated as the present value of an ordinary annuity of
$13,000 for 4 years, minus the initial investment cost.
By comparing the NPV of both machines, Cliff would choose Machine A because NPV of A > NPV of B by $1,044.
31 comments · newest first
CH
Chara
10 months ago
Machine B's IRR being higher could be a game changer too!
IZ
Izetta
11 months ago
Totally agree with Machine A! $1,044 is still a solid margin.
DA
Dalene
11 months ago
Wait, are we sure about those numbers? $22,000 seems off.
OS
Osvaldo
11 months ago
I think Machine B is the better option. The NPV difference is huge!
ER
Eric
11 months ago
Machine A has a higher NPV, so it makes sense to choose it.
CA
Carlee
12 months ago
I’m not clear on whether we should focus on NPV or IRR for this question. I thought both metrics were important, but I’m unsure how they apply here.
NA
Natalya
12 months ago
I feel like Machine B might be the right choice since it seems like it had a significantly higher NPV in one of our case studies.
SH
Sharee
12 months ago
I think Machine A has a higher NPV based on our practice questions, but I can't recall the specific numbers we used.
ED
Eden
1 year ago
I remember we discussed how to calculate NPV and that the higher NPV is usually the better choice, but I’m not sure about the exact values here.
BU
Buck
1 year ago
No problem, I've got this. The question clearly states to choose the machine with the higher NPV, so that's what I'll focus on. I just need to be careful to discount the cash flows at the 8% cost of capital.
AL
Alonso
1 year ago
I'm a little confused on how to approach this. Should I be looking at the IRR instead of the NPV? Or is there some other factor I'm missing? I want to make sure I get this right.
GO
Golda
1 year ago
Okay, I think I've got this. The key is to use the given cost of capital of 8% to discount the cash flows and find the NPV. Then I just need to compare the NPVs and choose the higher one.
GE
Geoffrey
1 year ago
Hmm, this seems like a classic capital budgeting problem. I'll need to calculate the NPV for each machine and compare them to determine which one has the higher NPV.
MI
Micaela
2 years ago
Wait, was this question sponsored by the Postal Service? I bet they're trying to get us to choose the more expensive option just to line their own pockets. Sneaky, sneaky!
VO
Von
2 years ago
I just hope Cliff doesn't get the machines mixed up and end up with a machine that can only sort mail by the color of the envelope. That would be a real 'first-class' disaster!
CO
Colby
2 years ago
Hmm, I'm not so sure. Option D seems interesting to me. If the internal rate of return for Machine A is higher than Machine B, that could be a compelling reason to choose it.
MA
Mattie
2 years ago
I see your point, but Machine A has a higher NPV than Machine B by $8,000. That's still a good reason to choose it.
EL
Elouise
2 years ago
But Machine B has a higher NPV than Machine A by $22,000. That seems like a significant difference.
IS
Isidra
2 years ago
I think Machine A is the better choice because its NPV is higher than Machine B by $1,044.
ST
Stanton
2 years ago
I'm going with C. The NPV of Machine A is $8,000 higher than the NPV of Machine B, so that's the better option in my opinion.
NA
Natalie
2 years ago
In that case, Machine A it is. Let's go with the safer option.
MO
Monroe
2 years ago
That's true, but NPV is usually considered a more reliable measure for investment decisions.
VA
Valentin
2 years ago
But what about the IRR? Machine B has a higher IRR, maybe that's important too.
HO
Hobert
2 years ago
I agree with you, Machine A seems like the better choice with a higher NPV.
FR
France
2 years ago
But Machine B has a higher IRR, so maybe that's a better choice.
LO
Lou
2 years ago
I think the answer is A. The net present value of Machine A is greater than the net present value of Machine B by $1,044, so that's the clear choice here.
JA
Jarvis
2 years ago
Looks like Cliff should go with Machine A then.
BU
Bulah
2 years ago
I agree, the numbers don't lie. Machine A it is.
JO
Joseph
2 years ago
That's true, Machine A seems like the better choice financially.
JU
Julieta
2 years ago
Machine A has a higher NPV than Machine B by $1,044.
NI
Nina
2 years ago
I think Cliff should choose Machine A because its NPV is higher than Machine B.