Question

Blossom, Inc. management is considering purchasing a new machine at a cost of $4,480,000. They expect this equipment to produce cash flows of $749,490, $934,650, $971,930, $1,021,400, $1,291,260, and $1,198,500 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? (Enter negative amounts using negative sign e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.)

Answer 1

Compute the NPV of the machine as follows: The rate of discounting used for computation of the NPV is 15%. + Net Present Value(NPV)= Present value of future cash flows - Initial cost ($ 749,490.00 $ 934,650.00 $ 971,930.00 (1+15%)* (1+15%)* (1+15%)" -$ 4,480,000.00 $ 1,021,400.00 $ 1, 291, 260.00 $ 1,198,500.00 | (1+15%)* (1+15%)* (1+15%)° ) ($ 651,730.43 +$ 706, 729.68+$ 639,059.75+) -$ 4,480,000.00 $ 583,988.77+$ 641,984.43+$ 518,144.62 =-$ 738,362.31 + Hence, the NPV of the project is -$738,326.31 Alternatively

Use the following inputs and the formula in the excel to compute NPV as follows: 4 1 А Computation of NPV 2 Years Cash flows 3 O -4480000 749490 5 2 934650 63 971930 1021400 1291260 96 1198500 10 Discount rate 0.15 11 Net present value =NPV(B10, B4:B9)+B3 74 8 5 The result is as follows: 0 А Computation of NPV Years Cash flows $ 4,480,000.00 1 $ 749,490.00 2 $ 934,650.00 63 $971,930.00 4 $ 1,021,400.00 $ 1,291,260.00 $ 1,198,500.00 10 Discount rate 15% 11 Net present value $ 738,362.31 Hence, the NPV of the project is $738,326.31