Question

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $250,000 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 $1,600,000. The cost of the machine will decline by $190,000 per year until it reaches $840,000, where it will remain.

  

If your required return is 16 percent, which year should you purchase the machine?

     

What is the NPV if you purchase the machine in the optimal year?

     

Answer 1

We purchase the machine in which the NPV is the highest and positive

We calculate the NPV using NPV function in excel

Here, since the NPV is highest and positive if the machine is purchased in year 4

NPV in optimal year purchase = $44837.19

Here, since the NPV is highest and positive if the machine is purchased in year 4

NPV in optimal year purchase = $44837.19