Question

35. Net Present Value Analysis. Wood Products Company would like to purchase a omputerized wood lathe for $100,000. The machine is expected to have a life of 5 years, and a salvage value of $5,000. Annual maintenance costs will total $20,000. Annual net cash receipts resulting from this machine are predicted to be $45,000. The company’s required rate of return is 15 percent.

Required:

a. Ignoring the time value of money, calculate the net cash inflow or outflow resulting from this investment opportunity.

b. Find the net present value of this investment using the format presented in.

Round to the nearest dollar.

c. Should the company purchase the wood lathe? Explain. Internal Rate of Return Analysis. Wood Products Company would like to purchase a computerized wood lathe for $100,000. The machine is expected to have a life of 5 years, and a salvage value of $5,000. Annual maintenance costs will total $20,000. Annual net cash receipts resulting from this machine are predicted to be $45,000. The company’s required rate of return is 15 percent (this is the same data as the previous exercise).

Answer 1

Req a. Cash inflows and outflows
Year	Cash Flows
0	-100000	Initial investment
1	25000	Annual cash receipts less Annual maintenance cost
2	25000	Annual cash receipts less Annual maintenance cost
3	25000	Annual cash receipts less Annual maintenance cost
4	25000	Annual cash receipts less Annual maintenance cost
5	30000	Annual cash receipts less Annual maintenance cost + salvage value
Req b:
Year	cashflows	PVF @ 15%	Present value
0	-100000	1	-100000
1	25000	0.869565	21739.13
2	25000	0.756144	18903.59
3	25000	0.657516	16437.91
4	25000	0.571753	14293.83
5	30000	0.497177	14915.3
Net present value			-13710
Req C: No Company should not purchasse the machine, as the NPV of machine is (13710)
IRR:
NPV at 15% = ($13710)
NPV at 9%
Year	cashflows	PVF @ 9%	Present value
0	-100000	1	-100000
1	25000	0.917431	22935.78
2	25000	0.84168	21042
3	25000	0.772183	19304.59
4	25000	0.708425	17710.63
5	30000	0.649931	19497.94
Net present value			491
IRR = Lower rate + (NOV at lower rate/ Difference in NOV) * Difference in Rates
	9% + ( 491 / 14201)*6% = 9.21%