Question

Baird Bros. Construction is considering the purchase of a machine at a cost of $203,000. The machine is expected to generate cash flows of $38,000 per year for 10 years and can be sold at the end of 10 years for $28,000. Interest is at 12%. Assume the machine purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required: a. What is the net present value of the cash flows?

b. Determine if Baird should purchase the machine. Yes No

Answer 1

A.
		Year-0	Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Year-8	Year-9	Year-10	NPV
1	Cost Of Machine	$ -2,03,000.00	-	-	-	-	-	-	-	-	-	-
2	Cash Flows	-	$ 38,000.00	$ 38,000.00	$ 38,000.00	$ 38,000.00	$ 38,000.00	$ 38,000.00	$ 38,000.00	$ 38,000.00	$ 38,000.00	$ 38,000.00
3	Sale Value or Salvage Value at end of 10 Years	-	-	-	-	-	-	-	-	-	-	$ 28,000.00
4	Present value for Interest @ 12%	1	0.89285714	0.79719388	0.71178025	0.63551808	0.56742686	0.50663112	0.45234922	0.40388323	0.36061002	0.32197324
5	Cash Flows(1+2+3)*4	-$2,03,000.00	$33,928.57	$30,293.37	$27,047.65	$24,149.69	$21,562.22	$19,251.98	$17,189.27	$15,347.56	$13,703.18	$21,250.23	20723.73
	Since Net Present value of Cash flows(NPV) is 20723.73 i.e Positive
B.	Since NPV is Positive then it is advisable to purchase the Machine