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17 October, 10:21

Your company is considering purchasing a machine for $270,000. This machine will bring revenues of $100,000 in the second year, of $150,000 in the third year, and of $75,000 in the fourth year. The machine will be worthless after the fourth year, so you will not be able to get any resale value out of it. If the interest rate is 6% per year, should you go ahead with this project?

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  1. 17 October, 11:38
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    Yes we should go with this project because it has a positive NPV of $4,350

    Explanation:

    We need to calculate the net present value of the machine to decide whether to invest in the machine or not.

    As per Given Data

    Costs $270,000

    Cash Inflows

    Year 2 $100,000

    Year 3 $150,000

    Year 4 $75,000

    Interest Rate = 6%

    Net Present Value

    As we know Net Present value is calculated by discounting each years cash flows using using the Weighted Average cost of Capital.

    Year Cash Inflows Discount factor 13% Present values

    Year 0 $ (270,000) (1+6%) ^-0 $ (270,000)

    Year 2 $100,000 (1+6%) ^-2 $89,000

    Year 3 $150,000 (1+6%) ^-3 $125,943

    Year 4 $75,000 (1+6%) ^-4 $59,407

    Net present value $4,350
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