Your company is considering investing in new material handling equipment for you
ID: 2620785 • Letter: Y
Question
Your company is considering investing in new material handling equipment for your warehouse. The new equipment will allow for savings in fuel and maintenance costs each year over 6 years. The first year savings is expected to be $3000 and that savings will decrease by $400 each subsequent year (i.e. $2600 savings year 2, $2200 savings year 3, and so on). The new equipment would cost $20,000 today, and at the end of 6 years it would have zero value. Your company would take out this money from an investment account that pays 5% nominal interest compounded annually. Is it worth buying the new material handling equipment? Why or Why not?
Explanation / Answer
Year
Annual Cash Inflows
Present Value factor at 5%
Present Value of Annual Cash inflows
1
3,000
0.952380952
2,857.14
2
2,600
0.907029478
2,358.28
3
2,200
0.863837599
1,900.44
4
1,800
0.822702475
1,480.86
5
1,400
0.783526166
1,096.94
6
1,000
0.746215397
746.22
$10,439.88
Net Present Value [NPV] = Present Value of cash Inflows – Initial Investment
= $10,439.88 – 20,000
= - $9,560.12 [Negative NPV]
Decision
NO. Since the Net present Value [NPV] of the Project is negative, It is not worthy to buying the new material handling equipment.
- Under Net Present Value Method, the investment proposal shall be acceptable if the Net Present Value is positive, or else it is rejected
Year
Annual Cash Inflows
Present Value factor at 5%
Present Value of Annual Cash inflows
1
3,000
0.952380952
2,857.14
2
2,600
0.907029478
2,358.28
3
2,200
0.863837599
1,900.44
4
1,800
0.822702475
1,480.86
5
1,400
0.783526166
1,096.94
6
1,000
0.746215397
746.22
$10,439.88
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