The management of Wyoming Corporation is considering the purchase of a new machi

Question

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:
Year Income from Operations Net Cash Flow
1 $18,750 $93,750
2 18,750 93,750
3 18,750 93,750
4 18,750 93,750
5 18,750 93,750
The net present value for this investment is:

Explanation / Answer

NPV = - P + A*(P/A,i=6%,N=5)

Based on how the answer is presented, it's not clear if the Net Cash Flow includes the income from operations. So I will calculate it for both cases:

*If it includes the income from operations:
NPV = -375,000 + 93,750*(4.212)
NPV = 19,875

*If it doesn't include the income from operations:
NPV = -375,000 + (18,750 + 93,750)*(4.212)
NPV = 98,850

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