Question

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $321,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,710,000. The cost of the machine will decline by $106,000 per year until it reaches $1,180,000, where it will remain.
If your required return is 13 percent, calculate the NPV today.

Answer 1

Answer:

NPV= $31,824.16

Explanation:

Giving the following information:

Cash flow= $321,000

Initial investmeent= $1,710,000

Residual value= $0

Rate of return= 13%

To calculate the net present value, we need to use the following formula:

NPV= -Io + ∑[Cf/(1+i)^n]

Io= -1,710,000

Cf1= 321,000/1.13= 284,070.80

Cf2= 321,000/1.13^2= 251,390.09

Cf3= 321,000/1.13^3= 222,469.10

And so on...

Cf10= 321,000/1.13^10= 94,562.86

∑[Cf/(1+i)^n]= 1,741,824.16

NPV= 1,710,000 + 1,741,824.16= $31,824.16