In: Accounting
You need a new piece of equipment to replace a machine that just blew up. You have been presented with 2 choices. Equipment X costs $10,000 and has an expected 3 year life – savings are estimated at: $6,000, $4,000 and $3,000 for the 3 years, respectively. Equipment Z costs $20,000 and has a residual value at the end of 3 years of 30% of its original cost. Z’s cost savings are estimated at $6,000, $7,000 and $8,000 for 3 years, respectively.
To Know which project to choose it is important to consider many factors mentioned:
1. NPV = PV of future cashflows of inverstment - initial investment
PV of cashflows = Cash inflow of year 1 * PVIF of 12% of 1 year + Cash inflow of year 2 * PVIF of 12% of 2 year + Cash inflow of year 3 * PVIF of 12% of 3 year
2. Discounted cashflows is equal to sum of PV of all the future cashflows.
3. IRR = '= IRR(all the inflows including initial investment) in excel
4. Profitability Index = DCF / initial investment
5. Payback period: is in how much time the initial investment is recovered