Southsiae Junk Yard needs to buy a car smasher. The machine would add the follow

Question

Southsiae Junk Yard needs to buy a car smasher. The machine would add the following revenues to the business over the next three years: Year 1 Cash savings-$30,000 Year 2 Cash savings plus additional scrap sales -$40,000 Year 3 Cash savings plus additional scrap sales -$55,000 The initial cost of the machine is SI 00.000. At the end of three years, its salvage value is estimated at $20,000. The firm has a cost of capital of 12% Required: Using the net present value method, determine whether the company should purchase the machine. (Ignore income tax effects.) Show Computations

Explanation / Answer

Answer:

AS the NPV is positive the company should purchase the machine.

Year Cashflow PV factor @12% PV (in$) 0 -100000 1 -100000 1 30000 0.8929 26787 2 40000 0.7972 31888 3 75000 0.7118 53385 ($55,000+20,000) NPV = $12060

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