Question

You purchase a widget-making machine that can produce $4,000 worth of widgets each year for up to four years. However, there is a 15% chance that the machine will break entirely at the end of each year after the cash for that year has been produced. (This is roughly the process describing how incandescent light bulbs burn out, too.) What is the expected NPV of this widget machine? Assume a 10.9% discount factor, applicable beginning with the first $4,000. ___________________

New technology would cost $8585, but it will reduce expenses by $541 per year starting next year, forever. Additionally, the new technology would complement the production process by increasing productivity. This increases profits by $804 per year, also forever. Assuming the discount rate is 6.7%, what is the NPV of this project?________________

Carry out calculations to at least 4 decimal places. Enter percentages as whole numbers. Example: 3.03% should be entered as 3.03. Do not include commas or dollar signs in numerical answers.

Answer 1

Expected NPV is NPV weighted by the probability

Also PV of perpetual benefits = Benefits/discount rate