Final answer:
NPV is calculated by discounting future cash flows to present values using the company's hurdle rate and subtracting the initial investment. This process involves applying the discount rate for each year's cash flow and summing them to find if the investment is financially viable.
Step-by-step explanation:
To compute the net present value (NPV) of an investment in a new combine harvester machine for Pickwick Inc., we first discount each of the expected cash flows back to their present value using the company's hurdle rate of 8%. For each year, the present value (PV) is calculated using the formula PV = Cash Flow / (1 + r)^n, where 'r' is the discount rate (in this case, 8%, or 0.08) and 'n' is the number of periods until the cash flow is received.
After calculating the present value for each year's cash flow, we sum them up and subtract the initial investment of $100,000 to obtain the NPV of the project. NPV is a critical financial metric used to assess the profitability of an investment and it is important that the NPV is greater than zero for the investment to be considered worthwhile.
To compute the Net Present Value (NPV) of the investment, we need to calculate the present value of each cash flow and then subtract the initial investment. The present value is calculated by discounting each cash flow using the company's hurdle rate of 8%.