Question

Assume revenues decrease and expenses increase with the age of the machine as given in the table below and it can be sold for $200,000 at the end of year five. Calculate NPV, payback, BCR, and IRR, should the equipment be purchased if the discount rate is 6% or 10%?

           Revenue   Expense

   Year 0       -      $1,500,000 (investment)

   Year 1       $850,000   $200,000

   Year 2       $750,000   $250,000

   Year 3       $650,000   $300,000

   Year 4       $550,000   $350,000

   Year 5       $450,000   $400,000

Answer 1

Year	revenue	cost	operating profit	net operating cash flow	present value of cash flow = net operating cash flow/(1+r)^n r= 6%
0				-1500000
1	850000	200000	650000	650000	613207.5
2	750000	250000	500000	500000	444998.2
3	650000	300000	350000	350000	293866.7
4	550000	350000	200000	200000	158418.7
5	450000	400000	50000	250000	186814.5
	sum of present value of cash inflow				1697306
	sum of present valueof cash outflow				1500000
	NPV				197305.8
	BC ratio	sum of present value of cash inflow/cash outflow	1697306/1500000		1.131537
	IRR				11.90%
Year	net operating cash flow	cumulative cash flow
0	-1500000
1	650000	650000
2	500000	1150000
3	350000	1500000
4	200000
5	250000
Full amount in recoverable in three years so payback period Is 3 years
Year	revenue	cost	operating profit	net operating cash flow	present value of cash flow = net operating cash flow/(1+r)^n r= 10%
0				-1500000
1	850000	200000	650000	650000	590909.1
2	750000	250000	500000	500000	413223.1
3	650000	300000	350000	350000	262960.2
4	550000	350000	200000	200000	136602.7
5	450000	400000	50000	250000	155230.3
	sum of present value of cash inflow				1558925
	sum of present valueof cash outflow				1500000
	NPV				58925.43
	BC ratio	sum of present value of cash inflow/cash outflow	1558925/1500000		1.039284
	IRR				11.90%