Question

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.55 million and create incremental cash flows of $825,757.00 each year for the next five years. The cost of capital is 11.71%. What is the net present value of the J-Mix 2000?

Answer 1

To calculate the net present value (NPV) for Caspian Sea Drinks' potential purchase of a J-Mix 2000 machine, we discount the incremental cash flows expected from the investment at the company's cost of capital and subtract the initial investment cost.

Step-by-step explanation:

The question asks for the calculation of the net present value (NPV) of an investment opportunity for Caspian Sea Drinks, specifically the purchase of a J-Mix 2000 machine. To determine the NPV, we will discount the incremental cash flows that the machine will generate over the next five years at the company's cost of capital.

The incremental cash flows from the machine are $825,757.00 annually for five years, and the cost of capital is 11.71%. The cost of the machine is $1.55 million. The NPV is calculated by subtracting the initial investment from the sum of the present values of the future cash flows.

1. First, we need to discount each of the annual incremental cash flows by the cost of capital using the formula for present value: PV = Cash Flow
   `/ (1 + r)^n`, where PV is the present value, r is the discount rate (cost of capital), and n is the year of the cash flow.
2. Then, we sum up all the discounted cash flows.
3. Finally, we subtract the initial investment from the sum of the discounted cash flows to get the NPV.

If the NPV is positive, it means the investment is expected to add value to the company. If it is negative, it would subtract value.