Question

Hopi Company is considering the possibility of replacing one of its current machines used in production with a new machine. The new machine has an estimated useful life of eight years. The company uses an 8 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). HOPI COMPANY NET CASH INFLOWS FOR CAPITAL BUDGETING ANALYSIS Year Net Cash Inflows $ 170,000 2 155,000 150,000 3 100,000 100,000 5 100,000 6 95,000 7 90,000 8 The salvage value of the machine is expected to be $20,000 in Year 8. is $750,000. machine The cost of the new Compute the net present value of the machine. Round your answer to the nearest whole dollar. Should the company purchase the new machine? Explain. REQUIRED: (1) (2)

Answer 1

Year	Net cash inflow (i)	Factor value (ii)	present value of cash inflows (i x ii)
1	170,000	0.92593	157,408.1
2	155,000	0.85734	132,887.7
3	150,000	0.79383	119,074.5
4	100,000	0.73503	73,503
5	100,000	0.68058	68,058
6	100,000	0.63017	63,017
7	95,000	0.58349	55,431.55
8	90,000	0.54027	48,624.3
8	20,000	0.54027	10,805.4
Total			$728,809.55

1.

Net present value = present value of cash inflows - Cost of new machine

= 728,809.55 - 750,000

= - $21,190 (Rounded to nearest whole dollar)

2.

The company should not purchase new machine, since net present value is negative.

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