Question

Baird Bros. Construction is considering the purchase of a machine at a cost of $136,000. The machine is expected to generate cash flows of $27,000 per year for 10 years and can be sold at the end of 10 years for $17,000. Interest is at 10%. Assume the machine purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

a. What is the net present value of the cash flows?

b. Determine whether Baird should purchase the machine.

Answer 1

Initial Cash outlay Interest rate Cash flows 1,36,000 10% 27,000 per year for 10 years $ A B $ $ C=A*B D Annual Cash flow PV Annuity factor @ 10%, 10th Year PV of Cash Inflow Residual value of Machine after 10 years PV factor @ 10%, 10th Year PV of Cash Inflow Total Less:Initial Investment Net Present Value (NPV) 27,000 6.145 1,65,915 17,000 0.386 6,562 1,72,477 1,36,000 29,915 FEDE C+F $ $ $ $ a Net Present Value (NPV) $ 29,915 b Since NPV is positive, hence Baird should purchase the machine.

a	Net Present Value (NPV)	$            29,915
b	Since NPV is positive, hence Baird should purchase the machine.

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