Question

Hunt Inc. intends to invest in one of two competing types of computer-aided manufacturing equipment: CAM X and CAM Y. Both CAM X and CAM Y models have a project life of 10 years. The purchase price of the CAM X model is $3,600,000, and it has a net annual after-tax cash inflow of $900,000. The CAM Y model is more expensive, selling for $4,200,000, but it will produce a net annual after-tax cash inflow of $1,050,000. The cost of capital for the company is 10%. Required: 1. Calculate the NPV for each project. Round present value calculations and your final answers to the nearest dollar.CAM X: $ __________CAM Y: $ __________

Answer 1

CAM X: $1,930,113

CAM Y: $2,251,799

Step-by-step explanation:

In order to calculate the Net Present Value of each project we need the difference between the Cash Outflow and Inflow at present value. As the inflow will be received in the future, therefore, we need to discount them at present value.

Moreover, since the inflows are consistent throughout the project's life of 10 years, we will use annuity at cost of capital 10% (as mentioned in question).

Calculation is shown below:

Annuity of 10% at 10 years time

Annuity = 1 − (1+r)^−n / r

Annuity = 1 − (1+0.1)^−10 / 0.1

Annuity = 6.14457

CAM X - Net Present Value

Net Present Value = (Cash Inflow x Annuity) - Cash Outflow

Net Present Value = (900,000 x 6.14457) - 3,600,000

Net Present Value = $1,930,113

CAM Y - Net Present Value

Net Present Value = (Cash Inflow x Annuity) - Cash Outflow

Net Present Value = (1,050,000 x 6.14457) - 4,200,000

Net Present Value = $2,251,799