1) The machine's investment's net present value is (-1,767).
2) There will be an $8000 difference between cash inflows and outflows over the machine's lifetime, which hasn't been discounted.
A strategy used by businesses to assess the value of a project is capital budgeting. The profitability of the potential project or investment is evaluated using this method. It assesses the risks and potential returns of the investment. In capital budgeting, there are several approaches to evaluating a project. Internal rate of return, payback time, and net present value are a few of the techniques.
1. Calculation of the net present value of the investment:
Year Cash Flows Present Value Present Value
Factor (12%)
(a) (b) (c) (b * c)
0 (-$27000) 1 (-$27000)
1 $7000 0.8929 $6250
2 $7000 0.7972 $5580
3 $7000 0.7118 $4982
4 $7000 0.6355 $4449
5 $7000 0.5674 $3972
NET PRESENT VALUE (-$1767)
The investment in the machine has a net present value of (-1,767).
The device would save operating costs by $7,000 per year, based on the information in the question; as a result, it generates an annual cash inflow. The cash flows are multiplied by the value in accordance with the designated discounting factor for each phase of the machine's life. The net present value of the machine is ($1,767), which is a negative amount. The machine investment plan ought to be rejected as a result.
2) Calculate the difference between undiscounted cash inflows and outflows over the machine's lifetime as follows:
Difference = Undiscounted Cash Inflows - Undiscounted Cash Outflows
Difference = $35000 - $27000
Therefore, the difference = $8,000
The undiscounted cash inflows are calculated as follows:
Undiscounted Cash Inflows = Cash Inflow during each year * Number of periods (years) of cash inflow
Undiscounted Cash Inflows = 7000 * 5 = $35,000
As a result, there will be an $8 000 difference between undiscounted cash inflows and outflows over the period of the machine's lifetime.
The undiscounted cash inflow is calculated by multiplying the period of cash inflows by the cash inflow for each period. The machine's acquisition price, or the undiscounted cash outflow, has been fixed at $27,000. The difference between the two is calculated by taking the cash outflow and subtracting it from the undiscounted cash inflows.
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