Question

a company is considering a $150,000 investment in machinery with the following net cash flows. the company requires a 10% return on its investments. year 1year 2year 3year 4year 5net cash flows$ 10,000$ 25,000$ 50,000$ 37,500$ 100,000(a) compute the net present value of this investment.(b) should the machinery be purchased?

Answer 1

To compute the net present value (NPV) of the investment, we need to discount each cash flow to its present value. Using a 10% discount rate, we can calculate the present value of each cash flow and sum up the present values to find the NPV. The NPV is $158,803.71, and since it is positive, the machinery should be purchased.

To compute the net present value (NPV) of the investment, we need to discount each cash flow to its present value.

Using a 10% discount rate, we can calculate the present value of each cash flow as follows:

Present value of Year 1 cash flow = $10,000 / (1 + 0.10)^1 = $9,090.91

Present value of Year 2 cash flow = $25,000 / (1 + 0.10)^2 = $20,661.16

Present value of Year 3 cash flow = $50,000 / (1 + 0.10)^3 = $39,669.42

Present value of Year 4 cash flow = $37,500 / (1 + 0.10)^4 = $26,446.28

Present value of Year 5 cash flow = $100,000 / (1 + 0.10)^5 = $62,935.94

Next, we sum up the present values of all the cash flows:

NPV = $9,090.91 + $20,661.16 + $39,669.42 + $26,446.28 + $62,935.94 = $158,803.71

Since the NPV is positive ($158,803.71), the machinery should be purchased.

A positive NPV means that the investment is expected to generate more value than its initial cost.