A company wants to expand by buying another machine in order to produce more pro

ID: 2726551 • Letter: A

Question

A company wants to expand by buying another machine in order to produce more products. The machine will cost $23573 and installation costs are expected to be $7061. The machine is expected to generate incremental after-tax cash flows of $9136 in the first year, $14457 in the second year and $17254 in the final year. What is the net present value of the project if the required rate of return is expected to be 15.4% (Please round your answer to the nearest dollar but exclude the $ sign when typing your answer.)

Explanation / Answer

Cash outflow = machine cost + installation cost

= $23573 + $7061

= $30634

Present value of cash outflow = cash outflow * present value factor at y=0,r=15.4%

= $30634 * 1

= 30634

Year

Cash inflow

Present value factor (15.4%)

Present value of cash inflow

First year

9136

0.8666

7917

Second year

14457

0.7509

10856

Final year

17254

0.6507

11227

30000

Net present value = present value of cash inflow - present value of cash outflow

= 30000 - 30634

= -634