Question

your company deciding whether to invest in a new machine. The new machine will increase cash flow by $275,000 per year. You believe the technology used in the machine has 10 years of life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine currently priced at $1.8 Million. The cost of the machine will decline by $ 140,000 per year until reaches $1.1 Million. where it will remain. 1) if you required return is 8 percent calculate the NPV today 2) if your required return is 8 percent calculate the following years. year 1. year 2. year 3. year 4. year 5. year 6.

Answer 1

1. If purchased today, Given Cash Flow,

Today = -$1,800,000

Year1 = Year 2 = Year 3 = ...Year 10 = $275,000

Required rate of return = 8%

Now NPV is the addition of discounted cash flows

So, NPV= -1,800,000 + 275000/(1+0.08) + 275000/(1+0.08)²+....+275000(1+0.08)¹⁰

on calculating NPV= $45272.4

2. On purchasing year 1

For, NPV in year 1

Price = 1,800,000- 140,000=$1,660,000

So Cash Flows Year1 = -1,660,000

Year 2= Year 3 = Year 4....=year 10 = 275000, On Similar Calculation

NPV = -$57894.2

Please note here xl calculation

-1660000	275000	275000	275000	275000	275000	275000	275000	275000	275000
0	1	2	3	4	5	6	7	8	9
1.08	1.08	1.08	1.08	1.08	1.08	1.08	1.08	1.08	1.08
-1660000	254629.6	235768.2	218303.9	202133.2	187160.4	173296.6	160459.9	148573.9	137568.5

Similarly

	Y2	Y3	Y4	Y5	Y6
Price	1520000	1380000	1240000	1100000	1100000
NPV	$60325.7	$51751.8	$31291.9	$2004.7	$49165.12

Xl Calculations

-1520000	254629.6	235768.2	218303.9	202133.2	187160.4	173296.6	160459.9	148573.9			60325.71
-1380000	254629.6	235768.2	218303.9	202133.2	187160.4	173296.6	160459.9				51751.766
-1240000	254629.6	235768.2	218303.9	202133.2	187160.4	173296.6					31291.908
-1100000	254629.6	235768.2	218303.9	202133.2	187160.4						-2004.74
-960000	254629.6	235768.2	218303.9	202133.2							-49165.12