Question

The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $350,000 in annual cash flows for a period of four years. The cost of capital is 14%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end of the four-year period. Income taxes are not considered. What is the net present value of the investment

Answer 1

$119,799.31

Step-by-step explanation:

The net present value of purchasing the new machine is the present value of its future cash flows discounted at the 14% cost of capital minus the initial investment outlay.

The initial investment outlay is the cost of the new machine minus the salvage value of the old machine, since the proceeds received from disposing of the old machine can be used in funding the new machine partly.

Initial investment outlay=$950,000-$50,000

Initial investment outlay=$900,000

NPV=$350,000/(1+14%)^1+$350,000/(1+14%)^2+$350,000/(1+14%)^3+$350,000/(1+14%)^4-$900,000

NPV=$119,799.31