. A company is considering the purchase of new equipment for $200,000. Expected

Question

. A company is considering the purchase of new equipment for $200,000. Expected cash flows for each of the next three years follow: Year 1 $100,000 Year 2 $90,000 Year 3 $75,000 Management of the company requires a 12% return on investment. Part 1. What is the net present value of this machine, assuming all cash flows occur at year-end? You must show how you calculated this number for credit. Hint: You will use Table B.1 (Present Value of $1) that is found in the Appendix B of the text. (1 point) Part 2. Based on the work you have done above, will the company likely invest in the new equipment? Explain why to receive credit. (1 point)

Explanation / Answer

Answer 1. Calculation of NPV of Project Particulars Year Amount 12% Factor Present value C D C X D Cash Inflow Net Cash Inflow 1       100,000            0.8929                  89,290 2         90,000            0.7972                  71,748 3         75,000            0.7118                  53,385 A. Total Cash Inflow - PV                214,423 Cash Outflow Cost of Investment 0       200,000            1.0000                200,000 B. Total Cash Outflow - PV                200,000 NPV (A - B)                  14,423 Answer 2. Yes, the company should invest in the Project - Since NPV is Positive - $14423

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