Question

IBX Pty Ltd is considering the purchase of a new machine that is expected to save the company $71,000 at the end of each year in reduced wages.

The machine costs $234,000, plus another $15,000 to be installed. It is expected to last for five years after which it can be sold as scrap for $42,000. Operating expenses (such as fuel and maintenance) are $7,000 pa.

a)Determine the annual net cash flows of this investment (ignore the effect of taxes). Enter the information in the following table. Indicate whether cash flows are + or -:

Time	0	1	2	3	4	5
Net Cash Flow

b)Calculate the NPV if the required rate of return is 11% pa. Give your answer in dollars and cents to the nearest cent.

NPV_11% = $

c)Calculate the NPV if the required rate of return is 13% pa. Give your answer in dollars and cents to the nearest cent.

NPV_13% = $

Answer 1

A	Computation of Initial Cash Outflow:	Year 0
	Cost of New Machine	$            234,000
	Installation Cost	$               15,000
	Initial Cash Outlay	$            249,000

B	Computation of Operational Cash Inflow
		Year 1-5
	Annual Savings	$                 71,000
	Operating Expenses (Annaul)	$                   7,000
	Net Operational Cashflow	$                 64,000

C	Computation of Terminal Cash Inflows	Year 5
	Sale of Scrap	$                 42,000
	Terminal Cash Inflow	$                 42,000

(a).

Time	0	1	2	3	4	5
Net Cash Flow	$ - 249,000	$     64,000	$ 64,000	$            64,000	$      64,000	$ 106,000
						($ 64,000 + $ 42,000)

(b)

	Computation of NPV
	Year	Cashflows	PVF@ 11 %	PV
A	0	$               (249,000)	1.0000	$            (249,000)
		PV of Cash Outflows		$            (249,000)
B	1	$                    64,000	0.9009	$                 57,658
	2	$                    64,000	0.8116	$                 51,944
	3	$                    64,000	0.7312	$                 46,796
	4	$                    64,000	0.6587	$                 42,159
	5	$                  106,000	0.5935	$                 62,906
		PV of Cash Inflows		$               261,462
	NPV	= B-A		$                 12,462

(c)

	Computation of NPV
	Year	Cashflows	PVF at 13 %	PV
A	0	$ -249,000	1.0000	$            -249,000
		PV of Cash Outflows		$            -249,000
B	1	$                    64,000	0.8850	$                 56,637
	2	$                    64,000	0.7831	$                 50,121
	3	$                    64,000	0.6931	$                 44,355
	4	$                    64,000	0.6133	$                 39,252
	5	$                  106,000	0.5428	$                 57,533
		PV of Cash Inflows		$               247,899
	NPV	= B-A		$                 -1,101