Question

a company is considering the purchase of a new machine. The cost of the machine is $70,000. the annual cash flow are: 1 year $13,000; 2 year $24,000; 3 year $33,000; 4 year $21000, a) if the cost of capital is 8%. what is the net present value of the machine?

Answer 1

Net present value of machine = 4,245

Step-by-step explanation:

In order to find the net present value of the machine we will discount the future cash flows of the machine using the cost of capital of 8% and add all of them up in order to calculate the present value of future cash flows and then we will subtract the initial cost of $70,000 in order to calculate the net present value.

Year 1 = 13,000 PV= 13,000/1.08=12,037

Year 2 = 24.000 PV=24,000/1.08^2=20,576

Year 3 = 33,000 PV=33,000/1.08^3=26,196

Year 4= 21,000 PV=21,000/1.08^4=15,435

12,037+20,576+26,196+15,435

Sum of the preset value of all future cash flows = 74,245

Net present value = 74,245-70,000=4,245