Luke Ricci owns a machine shop and has the opportunity to purchase a new machine

Question

Luke Ricci owns a machine shop and has the opportunity to purchase a new machine for $60,000. After carefully studying projected costs and revenues, Ricci estimates that the new machine will produce a net cash flow of $14,400 annually and will last for eight years. Ricci believes that an interest rate of 10 percent is adequate for his business.

Calculate the net present value of the machine to Ricci. NOTE: for net present value, subtract the cost of the asset from the present value of future cash flows.

Explanation / Answer

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$14400[1-(1.1)^-8]/0.1

=$14400*5.334926198

=$76822.94

NPV=Present value of inflows-Present value of outflows

=$76822.94-$60000

=$16822.94(Approx).

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