Question

IBX Pty Ltd is considering the purchase of a new machine that is expected to save the company $84,000 at the end of each year in reduced wages.

The machine costs $288,000, plus another $16,000 to be installed. It is expected to last for five years after which it can be sold as scrap for $49,000. Operating expenses (such as fuel and maintenance) are $8,000 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

Time	0	1	2	3	4	5
Savings in cost	0	84000	84000	84000	84000	84000
Less: Operating expenses	0	8000	8000	8000	8000	8000
Cash flow from operations	0	76000	76000	76000	76000	76000
Initial Investment	-304000	0	0	0	0	0
Scrap sale	0	0	0	0	0	49000
Net Cash Flow	-304000	76000	76000	76000	76000	125000
Discount Factor at 11%	1	0.900901	0.811622	0.731191	0.658731	0.593451
Discounted Cash flow at 11%	-304000	68468.47	61683.30	55570.54	50063.55	74181.42
NPV at 11% =	5,967.29
Discount factor at 13%	1	0.884956	0.783147	0.69305	0.613319	0.54276
Discounted Cash flow at 13%	-304000	67256.64	59519.15	52671.81	46612.22	67844.99
NPV at 13% =	-10095.19

Excel Formulas:

Discount factor formula, without excel:

Where,
i = rate of return
n = number of periods