Question

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $275,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1.8 million. The cost of the machine will decline by $140,000 per year until it reaches $1.1 million, where it will remain. If your required return is 8 percent, calculate the NPV today. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV If your required return is 8 percent, calculate the NPV for the following years. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. A negative answer should be indicated by a minus sign.) NPV Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

3 questions, thanks.

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first question should be answered. Kindly take note of it. Each new question should be posted separately.

Part A

NPV = cost + present value of the increased cash flows

NPV = –$1,800,000 + $275,000(PVIFA8%,10)

NPV = -1800000 + (275000*((1-(1.08^-10))/8%) = $45272.38

Part B

Year 1: NPV₁= ((-(1800000-140000))+(275000*PVIFA8%,9))/1.08

=((-1660000)+(275000*((1-(1.08^-9))/8%)))/1.08= $53605.72

Year 2: NPV₂= ((-(1660000-140000))+(275000*PVIFA8%,8))/(1.08^2)

=((-1520000)+(275000*((1-(1.08^-8))/8%)))/(1.08^2) = $51719.57

Year 3: NPV₃= ((-(1520000-140000))+(275000*PVIFA8%,7))/ (1.08^3)

=((-1380000)+(275000*((1-(1.08^-7))/8%)))/(1.08^3) = $41082.22

Year 4: NPV₄= ((-(1380000-140000))+(275000*PVIFA8%,6))/ (1.08^4)

=((-1240000)+(275000*((1-(1.08^-6))/8%)))/(1.08^4) = $23000.48

Year 5: NPV₅= ((-(1240000-140000))+(275000*PVIFA8%,5))/ (1.08^5)

=((-1100000)+(275000*((1-(1.08^-5))/8%)))/(1.08^5) = $(1364.39)

Year 6: NPV₆= ((-(1100000))+(275000*PVIFA8%,4))/ (1.08^6)

=((-1100000)+(275000*((1-(1.08^-4))/8%)))/(1.08^6) = $(119206.11)