Question

Net present value caine bottling corporation is considering the purchase of a new bottling machine. the machine would cost $275,000 and has an estimated useful life of 11 years with zero salvage value. management estimates that the new bottling machine will provide net annual cash flows of $45,800 and annual net income of $30,000. assume a discount rate of 12%. a. calculate the net present value of the bottling machine

Answer 1

From the calculation below, the net present value of the bottling machine is -$3,053.38.

Calculation of net present value

The net present value of the bottling machine can be calculated as follows:

Present value of annual net annual cash flows = Annual net cash flows * ((1 - (1 / (1 + Discount rate))^number of years) / Discount rate)

Present value of annual net annual cash flows = $45,800 * ((1 - (1 / (1 + 12%))^11) / 12%)

Present value of annual net annual cash flows = $45,800 * 5.9376991325097

Present value of annual net annual cash flows = $271,946.62

Therefore, we have:

Net present value of the bottling machine = Present value of annual net annual cash flows – Machine cost = $271,946.62 - $275,000 = -$3,053.38

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