Saturn Products is considering the purchase of a new industrial machine. The est

Question

Saturn Products is considering the purchase of a new industrial machine. The estimated cost of the machine is $50,000. The machine is expected to generate annual cash inflows for the next four years as follows:

Year

Annual Cash Inflow

1

$25,000

2

$20,000

3

$20,000

4

$15,000

The machine is not expected to have a residual value at the end of its useful life. If Palmetto uses a discount rate of 16%, what is the expected net present value of the machine? (ignore income taxes)

Year

Annual Cash Inflow

1

$25,000

2

$20,000

3

$20,000

4

$15,000

Explanation / Answer

the expected net present value of the machine = 25000/1.16 + 20000/1.16^2+ 20000/1.16^3 +15000/1.16^4 -50000 = $7,512.50

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