A factory is considering investing $60 000 in a new machine. Management estimate

Question

A factory is considering investing $60 000 in a new machine. Management estimates that for the first two years, the cash inflows for the machine will equal the cash outflows. However, they expect net cash flows to be $20 000 in years 3 to 5 and $10 000 in years 6 to 9. If the cost of capital is J1=7.5%, should the factory buy the new machine ?

A factory is considering investing $60 000 in a new machine. Management estimates that for the first two years, the cash inflows for the machine will equal the cash outflows. However, they expect net cash flows to be $20 000 in years 3 to 5 and $10 000 in years 6 to 9. If the cost of capital is J1=7.5%, should the factory buy the new machine ?

Explanation / Answer

Year Cash Flows DF at 7.5% Present Value 0 -60000 1 -60000 1 0        0.9302 0 2 0        0.8653 0 3 20000        0.8050           16,099.21 4 20000        0.7488           14,976.01 5 20000        0.6966           13,931.17 6 10000        0.6480             6,479.62 7 10000        0.6028             6,027.55 8 10000        0.5607             5,607.02 9 10000        0.5216             5,215.83 NPV = SUM of cash flows Yr 0 to 9 $         8,336.42 Yes, since NPV is positive.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.