Question

Your company buys a piece of equipment for $10,000 which has a 10 year service life, $1000 per year maintenance cost starting 1 year after purchase and through the service life of the equipment. The cost of capital for your company is 4%. The salvage value is $2,000. What is the NPV for this piece of equipment?

Answer 1

Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Year-9 Year-0 $10,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 Cost of equipment Annual maintenance cost Salvage value at the end Net Cash Flow (1) Discount factor @ 4% (2) Present Value (1) x (2) Year-10 [Cash outflow] $1,000 (Cash outflow] $2,000 (Cash inflow] $1,000 0.67556 [Ref: NOTE] $675.56 $10,000 1.00000 $10,000.00 $1,000 0.96154 $961.54 $1,000 0.92456 $924.56 $1,000 0.88900 $889.00 $1,000 0.85480 $854.80 $1,000 0.82193 $821.93 $1,000 0.79031 $790.31 $1,000 $1,000 0.759920.73069 $759.92 $730.69 $1,000 0.70259 $702.59 Net Present Value (NPV) -$16,759.77 [Sum of present value figures from year-o thru year-10] NOTE: Discount factor @ 4% = 1/(1+4%)°; 1/(1+4%)*; 1/(1+4%)?; ... and so on .... 1/(1+4%)*; 1/(1+4%)*; 1/(1+4%)20