Question

Replacing old equipment at an immediate cost of ​$80,000 and an additional outlay of $15,000 four years from now will result in savings of $22,000 per year for 6 years. The required rate of return is 12​% compounded annually.

Compute the net present value and determine if the investment should be accepted or rejected according to the net present value criterion.

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

PV of Cash Inflows:

Year	CF	PVF @12%	Disc CF
1	$ 22,000.00	0.8929	$ 19,642.86
2	$ 22,000.00	0.7972	$ 17,538.27
3	$ 22,000.00	0.7118	$ 15,659.17
4	$ 22,000.00	0.6355	$ 13,981.40
5	$ 22,000.00	0.5674	$ 12,483.39
6	$ 22,000.00	0.5066	$ 11,145.88
PV of Cash Inflows	$90,450.96

PV of Cash Outflows:

Year	CF	PVF @12%	Disc CF
0	$ 80,000.00	1.0000	$ 80,000.00
1	$               -	0.8929	$               -
2	$               -	0.7972	$               -
3	$               -	0.7118	$               -
4	$ 15,000.00	0.6355	$   9,532.77
PV of Cash Outflows	$89,532.77

NPV = PV of Cash Inflows - PV of Cash Outflows

= $90,450.96 - $89,532.77

= $ 918.19

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