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A firm is considering the purchase of a new technology that is expected to produce an...

A firm is considering the purchase of a new technology that is expected to produce an annual net saving in labor costs of $8000 in each of the six years. The initial cost is $30000, and annual maintenance cost is $1000. The company can access the required fund at the current market interest rate of 14% per annum compounded annually. By calculating NPV of the proposed expenditure, decide whether the technology should be purchased.

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Answer #1

net value of annual savings = $8000 savings - 1000 maintenance cost

=>$7000

present value of savings = $7000* present value of annuity factor for 6 years @14%.

present value of annuity factor = [1-(1+r)^(-n)]/r

=> [1- (1.14)^(-6)]/0.14

=>3.88867

present value of savings = 7000*3.88867

=>$27,220.69.

calculation of NPV

present value of savings - initial cost.

=>27,220.69 - 30,000

=> -$2,779.31.

since the NPV is negative, the technology shall not be purchased.

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