Answer this question: Net Present Value Analysis. Heston Farming Company would l
ID: 2512832 • Letter: A
Question
Answer this question:
Net Present Value Analysis. Heston Farming Company would like to purchase a harvesting machine for $100,000. The machine is expected to have a life of 4 years, and a salvage value of $20,000. Annual maintenance costs will total $28,000. Annual savings are predicted to be $60,000. The company’s required rate of return is 11 percent.
Required:
Ignoring the time value of money, calculate the net cash inflow or outflow resulting from this investment opportunity.
Find the net present value of this investment using the format presented in Figure 8.2. Round to the nearest dollar.
Should the company purchase the harvesting machine? Explain.
Using the following template:
Net Present Value Analysis a. The net cash inflow ignoring the time value of money is calculated as follows Today 0 Year 1 Year 2 Year 3 Year 4 Purchase price Maintenance costs Annual savings Salvage value Total cash in (out) Total Cash In Out b. The net present value is calculated as follows Today 0 _Year 1 _Year2 _Year3 _Year Purchase price Maintenance costs Annual savings Salvage value Total cash in (out) x PV factor (r =11%) Present value Net Present Value C.Explanation / Answer
Req a: Today 0 Year 1 Year 2 Year 3 Year 4 Total Purchase price -100,000 Maintenance Cost -28,000 -28,000 -28,000 -28,000 Annual savings 60,000 60,000 60,000 60,000 Salvage value 20000 Total cash in/(Out) -100,000 32000 32000 32000 52000 48000 (Cash in) Req b: Today 0 Year 1 Year 2 Year 3 Year 4 Total Purchase price -100,000 Maintenance Cost -28,000 -28,000 -28,000 -28,000 Annual savings 60,000 60,000 60,000 60,000 Salvage value 20000 Total cash in/(Out) -100,000 32000 32000 32000 52000 PV Factor @11% 1 0.900901 0.811622 0.731191 0.658731 Present Value -100000 28828.83 25971.92 23398.12 34254.01 12453 (NPV) Req C: Yes, the company must pruchase the machine as the NPV of machine is positive.
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