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Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $328,420 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 $1,760,000. The cost of the machine will decline by $110,000 per year until it reaches $1,320,000, where it will remain. The required return is 16%. What is the NPV if the company decides to wait 2 years to purchases the machine? (Round answer to 2 decimal places. Do not round intermediate calculations) UD Question 10 Osceola Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff (at the time the product is brought to market) is $27.5 million. If the HD DVD fails, the present value of the payoff is $6.9 million. If the product goes directly to market, there is a 60 percent chance of success. Alternatively, Osceola can delay the launch by one year and spend $1.43 million to test-market the HD DVD. Test-marketing would allow the firm to improve the product and increase the probability of success to 80%. The appropriate discount rate is 10%. What is the NPV of going directly to market? (Round answer to 2 decimal places. Do not round intermediate calculations)

Answer 1

Annual Cash Flow	3,28,420.00
No. of operating years of the machine	10
Cost of the Machine today	17,60,000.00
Annual Reduction in value of the machine	1,10,000.00
Recidual Value of the machine (Salvage Value)	13,20,000.00
Rate of Return	16%
Calculation of NPV at the beginning of 3rd year			Notes
Cost of the Machine at the beginning of 3rd year	-15,40,000.00		1760000 - 2 x 110000	Reduced the value by 220000 as the machine is being purchased after 2 years
PV of Cash Flows at the beginning of 3rd year	14,26,656.48		328420 x 4.344	Annual Cash Flow for remaining 8 years multiplied by Present Value Annutity Factor at 16% for 8 Years
PV of Salvage Value of the Machine at the beginning of the 3rd year	4,02,600.00		1320000 x 0.305	Salvage Value at the end of 10th year multiplied by Present Value Factor at 16% for 8 Years
NPV at the beginning of 3rd year	2,89,256.48			Summation
NPV at the beginning of 1st year	2,14,917.56		289256.48 x 0.743	NPV at the beginning of 3rd year discounted at 16% (PVF at 16% for 2 years)

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