Question

Baird Bros. Construction is considering the purchase of a machine at a cost of $128,000. The machine is expected to generate cash flows of $23,000 per year for 10 years and can be sold at the end of 10 years for $13,000. Interest is at 12%. 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)

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

2. Determine whether Baird should purchase the machine. Yes or No

Answer 1

Calculation of NPV
Years	Cash Flows	Dicount Factor @ 12%	Present Value
0	-$1,28,000	1.00	-$1,28,000
1	$23,000	0.8929	$20,536
2	$23,000	0.7972	$18,335
3	$23,000	0.7118	$16,371
4	$23,000	0.6355	$14,617
5	$23,000	0.5674	$13,051
6	$23,000	0.5066	$11,653
7	$23,000	0.4523	$10,404
8	$23,000	0.4039	$9,289
9	$23,000	0.3606	$8,294
10	$36,000	0.3220	$11,591
Net Present Value	$6,141

NPV is the difference between present value of the future cash flows and the initial investment.

Since the NPV is positive, Baird should purchase the machine.