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Eastside Farms is considering the purchase of a mechanical harvester. It costs $180,000 and is expected...

Eastside Farms is considering the purchase of a mechanical harvester. It costs $180,000 and is expected to last for five years. They presently hire 10 workers at $3,000 per month for each of the six harvesting months each year. The equipment would eliminate the need for 3 workers. Eastside projects a salvage value of $23,000. Ignoring the tax implications and assuming the opportunity cost of funds is 8.0%, what is the Net Present Value (NPV) of this proposed investment?

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Answer:

Net Present Value (NPV) = Present value of total cash inflows - Present value of total cash outflows

Present value of total cash outflows

Present value of total cash outflows = Cost of the asset = $180,000

Present value of total cash inflows

Annual cost savings = 3 workers * $3,000 per month * 6 months = $54,000

Salvage value at the end of Year 5 = $23,000

Net Present Value (NPV) = Present value of total cash inflows - Present value of total cash outflows

                                            = $231,254 - $180,000

                                            = $51,254

Note: The NPV general assumption is that the cash flows occur at end of every year.

ekkarill92 answered 2 years ago
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