Question

An agricultural accounting firm is considering purchasing several new copy machines. A $20,000 down payment would be required. Amortized loan payments of $12,000 would then be made at the end of years 1-5. The copiers would have a salvage value of $4,000 at the end of five years. Annual operating expenses would be $3,000 each year. $18,000 in cash inflows each year would be attributed to the copiers. Given a cost of capital of 5%, what is the approximate net present value of this investment?

	a.	$3,877
	b.	$4,329
	c.	Cannot be determined
	d.	-$3,877

Answer 1

First we have to find the total initial cost.

Down payment=$20,000

Present value of all the loan payments needs to be found using PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

rate=5%

nper=5

pmt=12000

fv=0

=PV(5%,5,12000,0,0)

PV=51954

Total cost=Year0 cashflow=$20,000+$51,954=$71,954

The cashflows and NPV calculations are given below.

NPV has to be calculated using NPV function in EXCEL

=NPV(rate,Year1 to Year5 cashflows)-Year0 cashflow

=NPV(5%,Year1 to Year5 cashflows)-71954

NPV=-3,877

Cost of capital	5%
	Year0	Year1	Year2	Year3	Year4	Year5	Remarks
Revenue		18000	18000	18000	18000	18000	Given
Expenses		-3000	-3000	-3000	-3000	-3000	Given
Operating cashflows		15000	15000	15000	15000	15000	revenue-expenses
Salvage value						4000
Total Operating cashflows	-71954	15000	15000	15000	15000	19000	add operating cashlows and salvage value
NPV	-3877

Option d is correct