Question

I am having a hard time understanding the formula used to calculate the NPV. I see the answer, but can't back into the answer. I see the formula PV(rate,nper, pmt, (fv), [type]), for each of the NPV values, but I need help understanding what each number means. Thanks

Problem statement below

The RW Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $9 million (the existing equipment has zero salvage value). The attraction of the new machinery is that it is expected to cut manufacturing costs from their current level of $8 a welt to $4. However, as the following table shows, there is some uncertainty both about future sales and about the performance of the new machinery: Pessimistic Expected Optimistic Sales, millions of welts 0.4 0.5 0.7 Manufacturing cost with new machinery, dollars per welt 6 4 3 Economic life of new machinery, years 7 10 13

Calculate the annual cost savings of the expected scenario. Assume a discount rate of 12%. RW does not pay taxes.

Answer 1

Solution for the above problem