Question

company is considering establishing a new machine to automate a packing process. The machine will save $ 50,000 in labor annually. The machine can be purchased for $ 250,000 today and will be used for 10 years. It has a salvage value of $5,000 at the end of its useful life. The new machine will require an annual maintenance cost of $ 11,000. The company has a minimum rate of return of 10%. What is the Net present worth and should they buy the machine

Answer 1

NPV = $-8,434.17

The firm shouldn't buy the machine

Step-by-step explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator:

Cash flow in year 0 = $-250,000

Cash flow each year from year 1 to 9 = $50,000 - $11,000 = $39,000

Cash flow in year 10 = $39,000 + $5,000 = $44,000

I = 10%

NPV = $-8,434.17

The NPV 8s negative and this indicates that the investment would be unprofitable. The firm shouldn't invest in the project.

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you