The McKenzie Company is considering buying a machine that would increase the com
ID: 2480999 • Letter: T
Question
The McKenzie Company is considering buying a machine that would increase the company's cash receipts by $2,200 per year for five years. Operation of the machine would increase the company's cash payments by $100 in each of the first two years, $200 in the third and fourth years, and $300 in the fifth year. The machine would cost $6,000 and would have a residual value of $500 at the end of the fifth year.
A)Compute the present value of the cash receipts and cash payments for the first five years. Assume a required rate of return of 16%.
B)Compute the present value of the cash payment today. Assume a required rate of return of 16%.
C)Compute the net present value of the investment. Assume a required rate of return of 16%.
Explanation / Answer
Considering only cash payments & receipts, not the investment and terminal values; Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 a Incremental Cash receipts 2,200 2,200 2,200 2,200 2,200 b Incremental Cash Paymnets 100 100 200 200 300 PV factor @16% 1 0.862 0.743 0.641 0.552 0.476 A PV of cash receipts =a*PV factor 1,897 1,635 1,409 1,215 1,047 Total PV of Cash receipts = $ 7,203.45 B PV of Cash payments =PV factor*b= 86.21 74.32 128.13 110.46 142.83 Total PV of Cash Payments = $ 541.95 NPV Calculation Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment (6,000) Salvage 500 Incremental Cash receipts 2,200 2,200 2,200 2,200 2,200 Incremental Cash Paymnets (100) (100) (200) (200) (300) Net Cash Flow (6,000) 2,100 2,100 2,000 2,000 2,400 PV factor @16% 1 0.862 0.743 0.641 0.552 0.476 PV of Net Cash Flow (6,000) 1,810 1,561 1,281 1,105 1,143 NPV = Sum of PV of cash flows= 900
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