Question

The management of ABC Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation by using the NPV methodology calculations

Year	Income from Operations	Net Cash Flow
1	$100,000	$180,000
2	40,000	120,000
3	20,000	100,000
4	10,000	90,000
5	10,000	90,000

Answer 1

The Project is acceptable.

The NPV is used to determine whether a project is acceptable or not. The Project is considered acceptable when NPV or Net present value is more than 1.

In case or Multiple projects, the project having highest NPV is selected.

Working for above decision is given below

Year	Cash Inflows	Present value Table factor	Present values of cash flows
1	$        180,000	0.909	$         163,620
2	$        120,000	0.826	$            99,120
3	$        100,000	0.751	$            75,100
4	$          90,000	0.683	$            61,470
5	$          90,000	0.621	$            55,890
Present value of cash flows			$         455,200
Less: Initial Investment			$   430,000.00
Net Present value			$            25,200