Fossa Road Paving Company is considering an investment in a curb-forming machine

Question

Fossa Road Paving Company is considering an investment in a curb-forming machine. The machine will cost $240,000, will last 10 years, and will have a $40,000 salvage value at the end of 10 years. The machine is expected to generate net cash inflows of $60,000 per year in each of the 10 years. Fossas discount rate is 18%. (NOTE: The present value of $1 for 10 periods at 18% is 0.191. The present value of an annuity of $1 in arrears for 10 periods at 18% is 4.494.) What is the present value of this machine? Ignore income tax considerations.

Explanation / Answer

Present value of annual cashflows of 60,000 for 10 years = 60,000 * 4.494 = 269,640

Present value of salvage value of 40,000 after 10 years = 40,000 * 0.191 = 7640

So present value = -240,000 + 269,640 + 7640 = $ 37,280

Answer: $ 37,280

Hope this helped ! Let me know in case of any queries.

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