Question

A machine can be purchased today for $1 million. It will generate cash flows of $200,000 at the end of each year for 10 years. However, a $300,000 overhaul will be required at the end of year 5. At a 10% opportunity cost of money, compute the net present value of this investment.

Answer 1

A Machine will incur an Initial Investment of $1 million today.

It will generate cashflows of $200,000 per year for 10 years however, in Year end 5 an overhaul will be required which would cost $300,000. So, Net cashflow in year end 5 = Cash inflow - cash outflow

= $200,000 - $300,000

= -$100,000

Computing the Present Value of the Investment:-

Year	Cash Flow of Machine($)	PV Factor @10%	Present Value of Cash Flow of Machine ($)
0	(1,000,000.00)	1.00000	(1,000,000.00)
1	200,000.00	0.90909	181,818.18
2	200,000.00	0.82645	165,289.26
3	200,000.00	0.75131	150,262.96
4	200,000.00	0.68301	136,602.69
5	(100,000.00)	0.62092	(62,092.13)
6	200,000.00	0.56447	112,894.79
7	200,000.00	0.51316	102,631.62
8	200,000.00	0.46651	93,301.48
9	200,000.00	0.42410	84,819.52
10	200,000.00	0.38554	77,108.66
			42,637.02

So, the net present value of this investment is $42,637.02

If you need any clarification, you can ask in comments.     

If you like my answer, then please up-vote as it will be motivating