Question

QUE Name Meentie werden Problem (10 points) He c h e possibly of replacing one of our machines wed in pred with a machine. The new machine has an estimated useful life of eight years. The company esan percent minimum desired rate of return in determining whether to accept capital investment projects. Below are the estimated net cash inflows from the machine (cash savings from using the new machine instead of the old machine). HOP COMPANY NET CASH INFLOWS FOR CAPITAL BUDGETING ANALYSIS Year Net Cash Inflows 170.000 155,000 150,000 100.000 100.000 100.000 95.000 90.000 The salvage value of the machine is expected to be $20,000 in Year 8. The cost of the new machine is S750.000 REQUIRED: (1) Compute the net present value of the machine. Round your answer to the nearest whole dollar. Should the company purchase the new machine? Explain. (2)

Answer 1

Year	Cash inflows	PV factor	Present values
1	$170,000	0.9259	$157,403
2	$155,000	0.8573	$132,881.5
3	$150,000	0.7938	$119,070
4	$100,000	0.7350	$73,500
5	$100,000	0.6806	$68,060
6	$100,000	0.6302	$63,020
7	$95,000	0.5835	$55,432.5
8	$90,000	0.5403	$48,627
8	$20,000 (salvage value)	0.5403	$10,806
			$728,800

Present value of cash inflows = $728,800

Present value of cash outflows = $750,000

1)

Net presents value = Present value of cash inflows - Present value of cash outflows

= $728,801 - $750,000

= ($21,200)

NPV is negative.

2)

Since NPV is negative, the company should not purchase the machine.