Question

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $180 per year and forever. The machine is currently priced at $2,000. The cost of the machine will decline by $25 per year until it reaches $1,800, where it will remain. If your required return is 8%, should you purchase the machine? If so, when should you purchase it? What is the value of option to wait?

Answer 1

Answer pageno n 2250-2000 2250-1975 2250-1950 Net Present value of machine at Each year cost of Increment Poulentvaluf net porodent Netpoelend vales Yeon machine tal cash incoremental value at year of today) flows cash flow (b-a) (Nov (180) 0:08.) +0-08 oftoday &2000 | $180 $2250 =$250 $250 $1945 $180 $ 2250 = $245 $254.63 $1950 $180 $ a aso $ 257.20 - $ 300 $1995 $180 $2250 2250-1925 =$325 $ 258.00 4 $1900 $180 $2250 =$350 5 $1875 $180 $aaso 2250-1875 = $375 $255.22 $1850 $180 $2250 2250-1850 = $ 400 $ 252.07 7 $1825 $180 $2250 2250 -1825 ԷՌԿԱՏ 3 2250-1900 257.26 6 8 $1800 $180 $aaso $450 The Nor of machine iş positive, hence machine should be purchased, since the today Nov iş highest at 3rd yeaa, Hence Machine should be piochaled in year 3. The valere of option to wait iş $8.00 (258-250