Question
In: Accounting
Northern Manufacturing Ltd. is considering the investment of $85,000 in a new machine. The machine will...
Northern Manufacturing Ltd. is considering the investment of $85,000 in a new machine. The machine will generate cash flow of $14,000 per year for each year of its eight-year life and will have a salvage value of $9,000 at the end of its life. The company’s cost of capital is 10%. Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.)
Required: Calculate the net present value of the proposed investment. (Ignore income taxes.)
Solutions
Expert Solution
| Initial Investment | 85,000 | ||
| Annual Cash flow | 14,000 | ||
| Salvage Value | 9,000 | ||
| Year | Annual Cash flow | PV Factor @10% | Present value $ |
| & Salvage value | |||
| 1 | 14,000 | 0.9091 | 12,727 |
| 2 | 14,000 | 0.8264 | 11,570 |
| 3 | 14,000 | 0.7513 | 10,518 |
| 4 | 14,000 | 0.6830 | 9,562 |
| 5 | 14,000 | 0.6209 | 8,693 |
| 6 | 14,000 | 0.5645 | 7,903 |
| 7 | 14,000 | 0.5132 | 7,185 |
| 8 | 14,000 | 0.4665 | 6,531 |
| 8 | 9,000 | 0.4665 | 4,199 |
| Total | 121,000 | 78,888 | |
| Net Present Value | - $ 6,112 | =78888-85000 | |
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