Question

Olsen Inc. purchased a $580,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the next 10 years. To encourage capital investments, the government exempts taxes on profits from new investments in this type of machinery. This legislation most likely will remain in effect in the foreseeable future. The equipment is expected to have 10 years of useful life and no salvage value at the end of this 10-year period. The firm uses straight-line depreciation. The net cash inflow is expected to be $151,000 each year. Olsen uses a discount rate of 10% in evaluating its capital investments.

The estimated net present value (NPV) of this proposed investment (rounded to the nearest thousand) is: (Note: the PV annuity factor from Table 2, Appendix C, 10%, 10 years is 6.145.)

Answer 1

Net present value = Present value of cash inflow-Present value of cash outflow

= (151000*6.145)-580000

Net present value = $347895