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13 April, 09:03

a company is considering the purchase of a new machine. The cost of the machine is $70,000. the annual cash flow are: 1 year $13,000; 2 year $24,000; 3 year $33,000; 4 year $21000, a) if the cost of capital is 8%. what is the net present value of the machine?

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  1. 13 April, 10:35
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    Net present value of machine = 4,245

    Explanation:

    In order to find the net present value of the machine we will discount the future cash flows of the machine using the cost of capital of 8% and add all of them up in order to calculate the present value of future cash flows and then we will subtract the initial cost of $70,000 in order to calculate the net present value.

    Year 1 = 13,000 PV = 13,000/1.08=12,037

    Year 2 = 24.000 PV=24,000/1.08^2=20,576

    Year 3 = 33,000 PV=33,000/1.08^3=26,196

    Year 4 = 21,000 PV=21,000/1.08^4=15,435

    12,037+20,576+26,196+15,435

    Sum of the preset value of all future cash flows = 74,245

    Net present value = 74,245-70,000=4,245
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Home » Business » a company is considering the purchase of a new machine. The cost of the machine is $70,000. the annual cash flow are: 1 year $13,000; 2 year $24,000; 3 year $33,000; 4 year $21000, a) if the cost of capital is 8%.
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