Question

Hello! Could you please help me answer this question and also helping with the essential calculations to support the answers reasoning? Thank you!

You are looking to invest in a new machine for your production plant. The machine costs $8.000 today. You expect to make products on this machine for 4 years, then you will no longer need the machine. Revenues of the company are expected to increase by $1,000 each year the machine is in production. The machine is also expected to decrease production costs of the company by $3,000 per year. The market value of the machine in 4 years is expected to be $1,000. The required rate of return demanded by the company on any capital expenditure is 10%. Should the company buy the machine?

Answer 1

Statement showing NPV

Particulars	0	1	2	3	4	NPV = sum of PV
Cost of Machine	-8000
Revenue from machine		1000	1000	1000	1000
Savings in production cost		3000	3000	3000	3000
Salvage value of machine					1000
Total cash flow	-8000	4000	4000	4000	5000
PVIF @ 10%	1.0000	0.9091	0.8264	0.7513	0.6830
PV	-8000	3636.36	3305.79	3005.26	3415.07	5362.48

Since NPV is positive one should buy the machine

PVIF = 1/(1+r)^n

n = no. of years , r = rate of interest

For 1 st year = 1/(1+10%)^1

=1/(1.1)^1 = 0.9091

For 2nd year = 1/(1.1)^2 = 0.8264

For 3rd year = 1/(1.1)^3 = 0.7513

For 4th year = 1/(1.1)^4 =0.6830