Bank wants to add 5 new ATM machines. The new machine will cost 71,000 each and

Question

Bank wants to add 5 new ATM machines. The new machine will cost 71,000 each and another 9,000 is required to install each machine. It expects to save .59 per transaction and generate 200,000 transactions per year. The new machines will last 9 years. What is the NPV of this project with 10% expected rate of return? Bank wants to add 5 new ATM machines. The new machine will cost 71,000 each and another 9,000 is required to install each machine. It expects to save .59 per transaction and generate 200,000 transactions per year. The new machines will last 9 years. What is the NPV of this project with 10% expected rate of return?

Explanation / Answer

Net Present Value (NPV) of the Project

Net Present Value (NPV) = Present Value of Cash Inflows – Initial Investment

Initial Investment

Initial Investment = Cost of the ATM Machines + Installation charges

= [71,000 x 5] + [9,000 x 5]

= 355,000 + 45,000

= 400,000

Present Value of cash inflows

Annual cash inflow = 200,000 Transaction x 0.59 per transaction

= 118,000

Present Value of cash inflows = Annual Cash inflows x [PVIFA 10%, 9 Years]

= 118,000 x 5.7590238

= 6,79,564.81

Therefore, Net Present Value (NPV) = Present Value of Cash Inflows – Initial Investment

= 6,79,564.81 – 400,000

= 2,79,564.81

“Net Present Value (NPV) of the project = 2,79,564.81”

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