Question

Our company is deciding whether to invest in a new machine. The new machine will increase cash flow by $324,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,740,000. The cost of the machine will decline by $110,000 per year until it reaches $1,190,000, where it will remain.

a. If your required return is 13 percent, calculate the NPV today?

b. If your required return is 13 percent, calculate the NPV if you wait to purchase the machine until the indicated year. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

NPV

Year 1 $

Year 2 $

Year 3 $

Year 4 $

Year 5 $

Year 6 $

Answer 1

Initial Investment= -1740000

Year 1 324,000/1.13= 286725

Year 2 324,000/1.13^2= 253740

Year 3 324,000/1.13^3= 224548

Year 4 324,000/1.13^4=198715

Year 5 324,000/1.13^5= 175854

Year 6 324,000/1.13^6= 155623

Year 7 324,000/1.13^7=137720

Year 8 324,000/1.13^8= 121876

Year 9 324,000/1.13^9= 107855

Year 10 (324,000+1,190,000)/1.13^10= 446007

=2,108,663-1,740,000= 368663

Step-by-step explanation: