Question

74. Rambus Inc. would like to purchase a production machine for $325.000, The machine is expected to have a life of three years, and a salvage value of $50,000. Annual maintenance costs will total $12.500. Annual savings are predicted to be $112.50X). The company's required rate of return is 12 percent. (12 Points) Factors: Present Value of $1 ir=12%) Year 0 1.0XXX) Year! 0.8929 Year 2 0.7972 Year 3 0.7118 Required: (1) Using the Present Value Factors for SI, calculate the net present value of this investment Cignoring taxes). (2) Based on your answer in requirement I should Rambus purchase the production machine? Today Year 1 Year 2 Year 3 Timeline (n) Purchase Price Maintenance Costs Annual Savings Salvage Value Total Cash In/Out) PV Factor PV Cash Flow Total PV Net Cash Flow 73. Rambus Inc. would like to purchase a production machine for $325,000. The machine is expected to have a life of three years, and a salvage value of $50,000. Annual maintenance costs will total $12,500. Annual savings are predicted to be $112,500. The company's required rate of return is 12 percent. (12 Points) Required: Ignoring the time value of money, calculate the net cash inflow or outflow resulting from this investment opportunity. Today Yeart Year 2 Year Timeline (n) Purchase Price Maintenance Costs Annual Savings Salvage Value Total Cash In/Out) Total Net Cash Flow

Answer 1

73)

Timeline (n)	Today	Year 1	Year 2	Year 3
Purchase Price	$       -3,25,000
Maintenance costs		$         -12,500	$         -12,500	$         -12,500
Annual savings		$       1,12,500	$       1,12,500	$       1,12,500
Salvage value				$           50,000	Total Net Cash Flow
Total Cash In/(Out)	$       -3,25,000	$       1,00,000	$       1,00,000	$       1,50,000	$                        25,000

74)

(1)

Timeline (n)	Today	Year 1	Year 2	Year 3
Purchase Price	$       -3,25,000
Maintenance costs		$         -12,500	$         -12,500	$         -12,500
Annual savings		$       1,12,500	$       1,12,500	$       1,12,500
Salvage value				$           50,000
Total Cash In/(Out)	$       -3,25,000	$       1,00,000	$       1,00,000	$       1,50,000
PV Factor	1	0.8929	0.7972	0.7118	Total Net Cash Flow
PV Cash Flow	$       -3,25,000	$           89,290	$           79,720	$       1,06,770	$                       -49,220

(2)

Since Net present value of investment is negative (loss of $,49,220) , Rambus should not purchase the production machine.