Question

Can someone please advise how to solve this problem step-by-step on a calculator? Thanks!

Option to wait. Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $435,000 per year. You believe the new technology used in the machine has a 10 year life. Obsolete 10 years from today. Machine is currently priced at 2.8 Million. Cost of machine will decline $215,000 per year until it reaches $2.155 million, where it will remain. If your required return is 9%, should you purchase the machine? If so, when should you purchase it?

Answer 1

Its a calculation of NPV First we will calculate the NPV using the cost of machine as 2.8 Million. Please find the table below:

Particulars
Cash Outflow	-2800000
Cash inflow at Year 1	435000
Cash inflow at Year 2	435000
Cash inflow at Year 3	435000
Cash inflow at Year 4	435000
Cash inflow at Year 5	435000
Cash inflow at Year 6	435000
Cash inflow at Year 7	435000
Cash inflow at Year 8	435000
Cash inflow at Year 9	435000
Cash inflow at Year 10	435000
Cost of capital	9.00%
Present value of cash flows	₹ 26,07,932.40
Net present value of cash flow	₹ -1,92,067.60

If we are using the financial calculator then we need to enter the cash outflow in negative, cash inflow in positive. Also please press enter after every entry of cash outflow/inflow. Then go to NPV calculation insert the interest rate as 9% and press down to net the NPV screen and press compute.

But we are getting the negative NPV which indicates that its not a good decision to invest in the machine in this year. So now we will take it year by year calculation of NPV till the machine reaches 2.155 million.

Year 2-4, when the cost of the machine decreases every year by 215,000

Particulars	Year 2
Cash Outflow	-2585000
Cash inflow at Year 1	435000
Cash inflow at Year 2	435000
Cash inflow at Year 3	435000
Cash inflow at Year 4	435000
Cash inflow at Year 5	435000
Cash inflow at Year 6	435000
Cash inflow at Year 7	435000
Cash inflow at Year 8	435000
Cash inflow at Year 9	435000
Cash inflow at Year 10	435000
Cost of capital	9.00%
Present value of cash flows	₹ 26,07,932.40
Net present value of cash flow	₹ 22,932.40

Particulars	Year 3
Cash Outflow	-2370000
Cash inflow at Year 1	435000
Cash inflow at Year 2	435000
Cash inflow at Year 3	435000
Cash inflow at Year 4	435000
Cash inflow at Year 5	435000
Cash inflow at Year 6	435000
Cash inflow at Year 7	435000
Cash inflow at Year 8	435000
Cash inflow at Year 9	435000
Cash inflow at Year 10	435000
Cost of capital	9.00%
Present value of cash flows	₹ 26,07,932.40
Net present value of cash flow	₹ 2,37,932.40

Particulars	Year 4
Cash Outflow	-2155000
Cash inflow at Year 1	435000
Cash inflow at Year 2	435000
Cash inflow at Year 3	435000
Cash inflow at Year 4	435000
Cash inflow at Year 5	435000
Cash inflow at Year 6	435000
Cash inflow at Year 7	435000
Cash inflow at Year 8	435000
Cash inflow at Year 9	435000
Cash inflow at Year 10	435000
Cost of capital	9.00%
Present value of cash flows	₹ 26,07,932.40
Net present value of cash flow	₹ 4,52,932.40

Looking at the calculation, my suggestion would be to invest in the year 4 when the machine cost reduces to 2.155 million as we will have the maximum NPV then