Question

Clairmont Corporation is considering the purchase of a machine that would cost $140,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $30,000. The company requires a minimum pretax return of 7% on all investment projects. (Ignore income taxes in this problem.)

Answer 1

SL #	Details		year 0	year 1	year 2	year 3	year 4	year 5
i	Initial investment		$      (140,000)
ii	Annual saving			$       30,000	$       30,000	$       30,000	$       30,000	$       30,000
iii	Salvage value							$       18,000
iv=i+ii+iii	Net Cash flow		$      (140,000)	$       30,000	$       30,000	$       30,000	$       30,000	$       48,000
v	PVIF @7%		1.000	0.935	0.873	0.816	0.763	0.713
vi=v*iv	NPV		$      (140,000)	$       28,037	$       26,203	$       24,489	$       22,887	$       34,223	$      (4,160)
Since NPV is negative hence project should be rejected