Question

A Discounted Cash Flow is a required calculation to comply with many GAAP regulations.

Hammer Time Inc, had the choice of purchasing a new machine for $38,900.  

The following shows the Net Cash Flow of:

1. Not purchasing the new equipment

2. Purchasing the equipment

Year                          No purchase                         Yes purchase

1   $89,930                                   $145,290

  2                               $181,000   $164,910

3                               $181,000 $191,900

  4                               $181,000 $199,900

5   $181,000                                   $210,900

Calculate the discounted cash flow for each scenario with an interest rate of 6.5%

What is the NPV of buying the equipment?

Answer 1

Statement showing Cash flows			No purchase		Yes purchase
Particulars	Time	PVf 6.5%	Amount	PV
Cash Outflows	-	1.00	-	-	(38,900.00)	(38,900.00)
PV of Cash outflows = PVCO				-		(38,900.00)
Cash inflows	1.00	0.9390	89,930.00	84,441.31	145,290.00	136,422.54
Cash inflows	2.00	0.8817	181,000.00	159,580.33	164,910.00	145,394.43
Cash inflows	3.00	0.8278	181,000.00	149,840.69	191,900.00	158,864.24
Cash inflows	4.00	0.7773	181,000.00	140,695.48	199,900.00	155,386.89
Cash inflows - Residual Value	4.00	0.7299	181,000.00	132,108.43	210,900.00	153,931.87
PV of Cash Inflows =PVCI				666,666.24		749,999.96
NPV= PVCI - PVCO				666,666.24		711,099.96
NPV of buying the equipment = 711,099.96 - 666,666.24	44,433.72