Question

The Lees are considering adding a new piece of equipment that will speed up the process of building the bobbleheads. The cost of the piece of equipment is $52000. It is expected that the new piece of equipment will lead to cash flows of $17000, $23000, and $30000 over the next 3 years. If the appropriate discount rate is 8%, what is the NPV of this investment? Explain the findings.

Answer 1

The NPV of the investment in the new equipment is $8,961.46. This means that the project is expected to generate a positive return and is therefore a good investment. The NPV takes into account the time value of money and the appropriate discount rate.

Step-by-step explanation:

To calculate the NPV of the investment, we need to discount the future cash flows to their present value. Using the appropriate discount rate of 8%, the present value of the cash flows are as follows:

• Year 1: $17,000 / (1+8%) = $15,740.74
• Year 2: $23,000 / (1+8%)^2 = $19,675.93
• Year 3: $30,000 / (1+8%)^3 = $24,544.79

The sum of the present values of the cash flows is $15,740.74 + $19,675.93 + $24,544.79 = $60,961.46. Subtracting the initial cost of the equipment, $52,000, from the total present value gives us the NPV: $8,961.46.