Question

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $306,000 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 $1,710,000. The cost of the machine will decline by $110,000 per year until it reaches $1,160,000, where it will remain.

If your required return is 12 percent, calculate the NPV if you purchase the machine today. What is the NPV if you wait to purchase the macine until each year indicated below? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Increase in cashflow per year	306,000.00
Useful life of machine (in Years)	10
Current price of machine	1,710,000.00
Rate of return	12%

Year	0	1-10
Purchase price of machine	(1,710,000.0000)
Increase in cashflows		306,000.0000
Net cashflows	(1,710,000.0000)	306,000.0000
PV factor @ 12% --> Year 0 --> 1/(1+12%)^0 Year 1 - 10 --> (1-(1+12%)^-10)/12%	1.0000	5.6502
PV of cashflows --> Net cashflows x PV factor	(1,710,000.0000)	1,728,968.2467
NPV	18,968.25

For the next part nothing is mentioned in the question as to which year end the purchase of machine would be made. However, in case of purchase of machine at the end of nth year, both purchase price and annuity cashflows would be discounted to year 0. Purchase price would be computed based on the reduction terms mentioned in the question capped to $ 1,160,000.