Question

Trilogy Construction, Inc. is considering purchasing a new piece of machinery that would save it $40,000 a year in annual labor costs. The machine would cost $130,000 and is expected to last 5 years and have a $10,000 salvage value. The company’s cost of capital is 8%. A) What is the machine’s net present value? B) Should the company buy the machine? Use the TVM tables and please show your work.

Answer 1

Initial Cost = $130,000

Salvage value = $10,000

Life of machine = 5 years

Annual cost savings = $40,000

Required rate of return = 8%

Required A)

	1	2	3	4	5
Net cash inflow	$          40,000	$        40,000	$        40,000	$        40,000	$        40,000
Salvage value					$        10,000
Total cash inflow	$          40,000	$        40,000	$        40,000	$        40,000	$        50,000
Present value factor	0.9259	0.8573	0.7938	0.7350	0.6806
Present value of cash flows	$    37,037.04	$ 34,293.55	$ 31,753.29	$ 29,401.19	$ 34,029.16
Total pv of cash inflows	$ 166,514.23
Less: Initial investment	$130,000
Net Present value	$36,514.23

Required B)

As NPV of the Investment if positive the company can buy the machine.