Question

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $321,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,710,000. The cost of the machine will decline by $106,000 per year until it reaches $1,180,000, where it will remain.

  

If your required return is 13 percent, calculate the NPV today. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

If your required return is 13 percent, calculate the NPV if you wait to purchase the machine until the indicated year. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Should you purchase the machine?

Yes No

  

If so, when should you purchase it?

Today One year from now Two years from now

Answer 1

Calculation of NPV Today
Year	Cash Inflows	PV Factor@13%	Present Value
1	321,000.00	0.885	284,085.00
2	321,000.00	0.783	251,343.00
3	321,000.00	0.693	222,453.00
4	321,000.00	0.613	196,773.00
5	321,000.00	0.543	174,303.00
6	321,000.00	0.48	154,080.00
7	321,000.00	0.425	136,425.00
8	321,000.00	0.376	120,696.00
9	321,000.00	0.333	106,893.00
10	321,000.00	0.295	94,695.00
Present value of Cash Inflows	1,741,746.00
Less: Cash outflow	1,710,000.00
Net Present Value	31,746.00
Calculation of NPV One year from now
Year	Cash Inflows	PV Factor@13%	Present Value
1	321,000.00	0.885	284,085.00
2	321,000.00	0.783	251,343.00
3	321,000.00	0.693	222,453.00
4	321,000.00	0.613	196,773.00
5	321,000.00	0.543	174,303.00
6	321,000.00	0.48	154,080.00
7	321,000.00	0.425	136,425.00
8	321,000.00	0.376	120,696.00
9	321,000.00	0.333	106,893.00
Present value of Cash Inflows	1,647,051.00
Less: Cash outflow	1,604,000.00
Net Present Value after 1 year	43,051.00
Therefore NPV Now			38,100.14
(43051 * 0.885)
Calculation of NPV Two year from now
Year	Cash Inflows	PV Factor@13%	Present Value
1	321,000.00	0.885	284,085.00
2	321,000.00	0.783	251,343.00
3	321,000.00	0.693	222,453.00
4	321,000.00	0.613	196,773.00
5	321,000.00	0.543	174,303.00
6	321,000.00	0.48	154,080.00
7	321,000.00	0.425	136,425.00
8	321,000.00	0.376	120,696.00
Present value of Cash Inflows	1,540,158.00
Less: Cash outflow	1,498,000.00
Net Present Value after 2 year	42,158.00
Therefore NPV now			33,009.71
(42158*0.783)
Decision : We should purchase a new Machinery after One year because NPV of that year is Highest