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 $318,000 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 $1,700,000. The cost of the mahinell decline by $106,000 per year until it reaches $1,170,000, where it will remain. If your required return is 13 percent, calculate the NPV today. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV If your required return is 13 percent, calculate the NPV for the following years. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Negative amounts should be indicated by a minus sign.) NPV Year 1 $ Year 2 $ Year 3 $ Year 4 Year 5 $ Year 6$

Explanation / Answer

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

a.

NPV today = -1700000 + 318000/(1+0.13)^1 + 318000/(1+0.13)^2 + 318000/(1+0.13)^3 +318000/(1+0.13)^4 + 318000/(1+0.13)^5 + 318000/(1+0.13)^6 + 318000/(1+0.13)^7 + 318000/(1+0.13)^8 + 318000/(1+0.13)^9 + 318000/(1+0.13)^10 = $25545.43

b.

NPV in 1 year:

NPV = -1700000 + 106000 + 318000/(1+0.13)^1 + 318000/(1+0.13)^2 + 318000/(1+0.13)^3 +318000/(1+0.13)^4 + 318000/(1+0.13)^5 + 318000/(1+0.13)^6 + 318000/(1+0.13)^7 + 318000/(1+0.13)^8 + 318000/(1+0.13)^9 = $37866.33

NPV in 2 years:

NPV = -1700000 + 2*106000 + 318000/(1+0.13)^1 + 318000/(1+0.13)^2 + 318000/(1+0.13)^3 +318000/(1+0.13)^4 + 318000/(1+0.13)^5 + 318000/(1+0.13)^6 + 318000/(1+0.13)^7 + 318000/(1+0.13)^8 = $38008.95

NPV in 3 years:

NPV = -1700000 + 3*106000 + 318000/(1+0.13)^1 + 318000/(1+0.13)^2 + 318000/(1+0.13)^3 +318000/(1+0.13)^4 + 318000/(1+0.13)^5 + 318000/(1+0.13)^6 + 318000/(1+0.13)^7 = $24390.12

NPV in 4 years:

NPV = -1700000 + 4*106000 + 318000/(1+0.13)^1 + 318000/(1+0.13)^2 + 318000/(1+0.13)^3 +318000/(1+0.13)^4 + 318000/(1+0.13)^5 + 318000/(1+0.13)^6 = -$4779.17

NPV in 5 years:

NPV = -1700000 + 5*106000 + 318000/(1+0.13)^1 + 318000/(1+0.13)^2 + 318000/(1+0.13)^3 +318000/(1+0.13)^4 + 318000/(1+0.13)^5 = $-51520.46

NPV in 6 years:

NPV = -1170000+ 318000/(1+0.13)^1 + 318000/(1+0.13)^2 + 318000/(1+0.13)^3 +318000/(1+0.13)^4 = $-224118.12

C. Yes. Since the NPV is positive

D. Two years from now. Since the NPV is higher two years from now.

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