Question

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $311,000 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 $1,680,000. The cost of the machine will decline by $106,000 per year until it reaches $1,150,000, 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.)

  

NPV

$

   

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.)

  

	NPV
Year 1	$
Year 2	$
Year 3	$
Year 4	$
Year 5	$
Year 6	$

   

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

a. If we purchase the machine today, the NPV = Cash outflow - PV of cash inflows = -1680000+(311000*PVAF(13%,10 years)) = -1680000+(311000*5.4262) = +7548.20

b. NPV calculations if machine is purchased at the given periods:

Year (t)	Cash outflow = Depreciated Price of machine	Incremental Cash inflow	Period of incremental cash inflow (years)	PVAF(13%, period of cash flow)	NPV at time 0
	(a)	(b)	( c)	(d)	NPVt = (a)+(b*d) NPV0 = NPVt/(1.13^t)
1	-1,574,000	318,000	9	PVAF(13%,9years) = 5.1317	NPV1 =-1574000+(318000*5.1317) = 57880.60 NPV0 = NPV1/(1.13^1) = 57880.60/(1.13^1) = 51,221.77
2	-1,468,000	318,000	8	PVAF(13%,8years) = 4.7988	NPV2 =-1468000+(318000*4.7988) = 58018.40 NPV0 = NPV2/(1.31^2) = 58018.4/(1.31^2) = 45,436.92
3	-1,362,000	318,000	7	PVAF(13%,7years) = 4.4226	NPV3 =-1362000+(318000*4.4226) = 44386.80 NPV0 = NPV3/(1.31^3) = 44386.8/(1.31^3) = 30,762.28
4	-1,256,000	318,000	6	PVAF(13%,6years) = 3.9975	NPV4 =-1256000+(318000*3.9975) = 15205.00 NPV0 = NPV4/(1.31^4) = 15205/(1.31^4) = 9,325.51
5	-1,150,000	318,000	5	PVAF(13%,5years) = 3.5172	NPV5 =-1150000+(318000*3.5172) = -31530.40 NPV0 = NPV5/(1.31^5) = -31530.4/(1.31^5) = -17,113.44
6	-1,150,000	318,000	4	PVAF(13%,4years) = 2.9745	NPV6 =-1150000+(318000*2.9745) = -204109.00 NPV0 = NPV6/(1.31^6) = -204109/(1.31^6) = -98,037.33

c. Should you purchase the machine? Yes, since the NPV from machine is +ve in the initial years.

d. When should you purchase it?

Particulars	Amount
NPV if purchased Today	7,561.72
NPV if purchased One year from now	51,221.77
NPV if purchased Two years from now	45,436.92

Since, the machine should be purchased one year from now since the NPV is highest at this point.

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