Question

Bruno Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $442,200. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $107,554 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view PV table.

Answer 1

Since PV tables are not given, I am using formulas to calculate the values of PV factors

PV Factor

= 1 / (1 + r) ^ n

Where,

r = Rate of interest = 10% or 0.10

n = Years 0 to 6

So, PV Factor for year 2 will be

= 1 / (1.10 ^ 2)

= 1 / 1.21

= 0.826446

The following table shows the calculations

Calculations	Particulars
	Years	0	1	2	3	4	5	6
A	Initial cash flow	(442,200)	-	-	-	-	-	-
B	Annual cash flows	-	107,554	107,554	107,554	107,554	107,554	107,554
C = A + B	Net cash flows	(442,200)	107,554	107,554	107,554	107,554	107,554	107,554
D	PV Factor	1.000000	0.909091	0.826446	0.751315	0.683013	0.620921	0.564474
E = C x D	Present value	(442,200)	97,776	88,888	80,807	73,461	66,783	60,711
F = Sum E	Net Present value	26,226

As we can find, the NPV of the project is positive, So, it should be accepted