Question

Taylor Company is considering the purchase of a new machine. The machine
will cost $247,000 and is expected to last for 9 years. However, the
machine will need maintenance costing $7,000 at the end of year four
and maintenance costing $30,000 at the end of year eight. In addition,
purchasing this machine would require an immediate investment of $50,000
in working capital which would be released for investment elsewhere at
the end of the 9 years. The machine is expected to have a $10,000 salvage
value at the end of 9 years. The machine will be used to generate net cash
inflows of $50,000 per year in each of the 9 years. Taylor Company has a
cost of capital of 8%.

Calculate the net present value (NPV) of this machine.

Answer 1

Compute the net present value as follows: Year A Cash flow Net cash inflow ($247,000+$50,000) -$297,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 ($50,000-$7,000) $43,000 $50,000 $50,000 $50,000 $50,000 ($50,000-$30,000) $20,000 |($50,000+$50,000+$10,000) $90,000 Net present value B (AXB) PVF @ 8% Present value 1.000000 -$297,000.0 0.925926 $46,296.3 0.857339 $42,866.9 0.793832 $39,691.6 0.735030 $36,751.5 0.680583 $29,265.1 0.630170 $31,508.5 0.583490 $29,174.5 0.540269 $10,805.4 0.500249 $45,022.4 $14,382.2 Therefore, the net present value is $14,382.2.