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.

Question

Business

Lincoln

20 September, 16:22

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.

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Answers (1)

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Cohen Graham · Answer 1

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