Your company is deciding whether to invest in a new machine. The new machine wil

Question

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $328438 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,760,000. The cost of the machine will decline by $110,000 per year until it reaches $1,320,000, where it will remain. The required return is 16%. What is the NPV if the company decides to wait 2 years to purchases the machine? (Round answer to 2 decimal places. Do not round intermediate calculations)

Explanation / Answer

As the machine is purchased after 2 years, initial investment = 1,760,000 - 2 x 110,000 = 1,540,000

The life of the machine will be 10 - 2 = 8.

NPV can be calculated using NPV function in excel or calculator with required rate of 16%

NPV = -213,581.64

Year CF 1 -1540000 2 328438 3 328438 4 328438 5 328438 6 328438 7 328438 8 328438 NPV -$213,581.64

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