Question

Your buddy in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $ 70. ​However, once​ built, the machine will last forever and will require no maintenance. The machine takes one year to be built and will cost $ 1000. Your buddy wants to know if he should invest the money to construct it. If the interest rate is 5 % per​ year, what should your buddy​ do? What is your advice if the machine takes one year to​ build?
A) calculate the NPV (Solution the profs gave:333, I got 400)
B) You convince your friend to improve the machine so that the amount of produced money will increase every year by 1% (Solution the profs gave: 667, I got 750)

Answer 1

Based on the amount it would cost to build the machine and the interest rate as well as the payoff, the following are true:

• A. $333
• B. $667

a. The machine will take a year to build which means the payoff will only start coming in next year.

First find the present value of the perpetuity:

= 70 / 5%

= $1,400

You then need to find the present value of the above in the current period:

= 1,400 / ( 1 + 5%)

= $1,333

NPV is:

= 1,333 - 1,000 cost

= $333

B. If the amount produced increases by 1%, you should use the Gordon Growth Model:

= Next payoff / ( Interest - Growth)

=70/ ( 5% - 1%)

= $1,750

Take this to current year:

= 1,750 / 1.05

= $1,667

NPV will be:

= 1,667 - 1,000

= $667

Find out more about NPV at brainly.com/question/7254007.