A Municipality Is Considering the Purchase of Two Large Lawn

Multiple Choice

A municipality is considering the purchase of two large lawn mowers which will be used to maintain baseball diamonds, soccer fields, parks and road boulevards. Increased fuel efficiency and improved speed, reducing employee hours, contribute to savings. Both machines have a useful life of six years. Machine A, costing $5,000, offers savings of $1000 a year and disposal value of $500. The Machine B costs $7,000, offers saving of $1,300 a year and a disposal value of $1,500. The municipality uses a 7% discount factor to assess its capital purchases.

A) Purchase Machine A as it has shorter payback period, 4 years.
B) Purchase neither machine because both have negative net present values.
C) Purchase Machine B as it has a higher NPV, $195.90.
D) Purchase Machine B as it has a shorter payback period, 3.5 years.
E) Purchase Machine A as it has a lower NPV, $99.65.