Your Company purchased a machine with an estimated useful life of 8 years. The machine will...

Your Company purchased a machine with an estimated useful life of 8 years. The machine will generate cash inflows of $96,000 each year. The salvage value at the end of the project is $80,000. Your Company's discount rate is 6%. The net present value of the investment is ($7,500). What is the purchase price of the machine?

Expert Solution

Net present value (NPV) = Present value of cash inflows (-) Initial investment

Present value of cash inflows:

Net present value (NPV) = -$7,500

Net present value (NPV) = Present value of cash inflows (-) Initial investment
Initial investment = Present value of cash inflows (-) NPV = $646,333.18 - ($7,500) = $646,333.18 + $7,500 = $653,833.18

Check:

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over the life of an investment project.
NPV is used to evaluate investment projects in capital budgeting.
A project with a positive NPV is accepted. A positive NPV indicates that the project will result in net cash inflows in today's dollars.
A project with a negative NPV is rejected. A negative NPV indicates that the project will result in net cash outflows in today's dollars.
The cash flows are discounted at a required rate of return. It may be a weighted average cost of capital, cost of debt, etc.

ekkarill92 answered 2 years ago

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