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 $317,000 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 machine will decline by $108,000 per year until it reaches $1,160,000, 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 $ Year 2 $ Year 3 $ Year 4 $ Year5 $ Year 6 S Should you purchase the machine? Yes If so, when should you purchase it? Today One year from now Two years from now

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 + 317000/(1+0.13)^1 + 317000/(1+0.13)^2 + 317000/(1+0.13)^3 +317000/(1+0.13)^4 + 317000/(1+0.13)^5 + 317000/(1+0.13)^6 + 317000/(1+0.13)^7 + 317000/(1+0.13)^8 + 317000/(1+0.13)^9 + 317000/(1+0.13)^10 = $20119.18

b.

NPV in 1 year:

NPV = -1700000 + 108000 + 317000/(1+0.13)^1 + 317000/(1+0.13)^2 + 317000/(1+0.13)^3 +317000/(1+0.13)^4 + 317000/(1+0.13)^5 + 317000/(1+0.13)^6 + 317000/(1+0.13)^7 + 317000/(1+0.13)^8 + 317000/(1+0.13)^9 = $34734.68

NPV in 2 years:

NPV = -1700000 + 2*108000 + 317000/(1+0.13)^1 + 317000/(1+0.13)^2 + 317000/(1+0.13)^3 +317000/(1+0.13)^4 + 317000/(1+0.13)^5 + 317000/(1+0.13)^6 + 317000/(1+0.13)^7 + 317000/(1+0.13)^8 = $37210.18

NPV in 3 years:

NPV = -1700000 + 3*108000 + 317000/(1+0.13)^1 + 317000/(1+0.13)^2 + 317000/(1+0.13)^3 +317000/(1+0.13)^4 + 317000/(1+0.13)^5 + 317000/(1+0.13)^6 + 317000/(1+0.13)^7 = $25967.51

NPV in 4 years:

NPV = -1700000 + 4*108000 + 317000/(1+0.13)^1 + 317000/(1+0.13)^2 + 317000/(1+0.13)^3 +317000/(1+0.13)^4 + 317000/(1+0.13)^5 + 317000/(1+0.13)^6 = -776.72

NPV in 5 years:

NPV = -1700000 + 5*108000 + 317000/(1+0.13)^1 + 317000/(1+0.13)^2 + 317000/(1+0.13)^3 +317000/(1+0.13)^4 + 317000/(1+0.13)^5 = $-45037.69

NPV in 6 years:

NPV = -1160000+ 317000/(1+0.13)^1 + 317000/(1+0.13)^2 + 317000/(1+0.13)^3 +317000/(1+0.13)^4 = $-217092.59

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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