Question

our company is deciding whether to invest in a new machine. The new machine will increase cash flow by $329,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,700,000. The cost of the machine will decline by $100,000 per year until it reaches $1,200,000, where it will remain.

  

If your required return is 14 percent, calculate the NPV today. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

If your required return is 14 percent, calculate the NPV for the following years. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. A negative answer should be indicated by a minus sign.)

NPV
Year 1	$
Year 2	$
Year 3	$
Year 4	$
Year 5	$
Year 6	$

Should you purchase the machine?

Yes No

If so, when should you purchase it?

Today One year from now Two years from now

Answer 1

Answer :-

(i) NPV today = 16102.05

(i) NPV subsequent years =

Year 1	$ 23996.78
Year 2	$ 20149.45
Year 3	$ 7325
Year 4	$ -12213.66
Year 5	$ -36624
Year 6	$ -109973.42

(iii) Yes, we should purchase the machine as it has positive NPV.

(iv) It should be purchased in One year from Now.

Calculation :

Year of Machine Purchase	Cost of machine	Cash flow benefit for number of years (Total life - Year of machine purchase)	PVAF for the number of years benefit @ 14%	Total PV of cash benefits (329,000 x PVAF)	NPV (Present value of benefits -Cost of machine)	PV factor @ 14% (Using Table)	Present Value of all NPV
0	1700000	10	5.216115646	17,16,102.05	16102.05	1	160102.05
1	1600000	9	4.946371837	16,27,356.33	27356.33	0.8771929568	23996.78
2	1500000	8	4.638863894	15,26,186.22	26186.22	0.76946768185	20149.45
3	1400000	7	4.288304839	14,10,852.29	10852.29	0.67497274768	7325
4	1300000	6	3.888667517	12,79,371.61	-20628.39	0.5920801381	-12213.66
5	1200000	5	3.433080969	11,29,483.64	-70516.36	0.51936883866	-36624
6	1200000	4	2.913712304	9,58,611.35	-241388.65	0.45558654062	-109973.42