The Crescent Company is considering the purchase of a new machine costing $200,0

Question

The Crescent Company is considering the purchase of a new machine costing $200,000. This machine is estimated to cost $5,000 per year in operating expenses but it will allow the company to earn an additional $100,000 per year in revenues. However, on average, only 75% of sales are collected in the year of the sale, the remaining 25% are collected in the following year. At the end of 3 years the machine will have a salvage value of $10,000. If the required rate of return is 10% what is the net present value of this project? (Round the answer to nearest whole dollar.)

Explanation / Answer

                 Cash Flow PV Factor Present Value
Year 0       ($200,000)    1.0000       ($200,000)
Year 1          $70,0001     0.9091         $63,637
Year 2          $95,0002     0.8264         $78,508
Year 3        $105,0003     0.7513         $78,887
Net Present Value                         $21,032
                                                    =========

1($100,000 x 75%) - $5,000
= $70,000
2($100,000 x 25%)+ ($100,000 x 75%) - $5,000
  = $95,000
3($100,000 x 25%)+ ($100,000 x 75%) +$10,000 - $5,000
= $105,000

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