XYZ Company is considering the purchase of a new machine. The machine will cost
ID: 2560091 • Letter: X
Question
XYZ Company is considering the purchase of a new machine. The machine will cost $200,000 and is expected to last 10 years. However, the machine will need maintenance costing $25,000 at the end of year three and at the end of year six. In addition, purchasing this machine would require an immediate investment of $35,000 in working capital which would be released for investment elsewhere at the end of the 10 years The machine is expected to have a $15,000 salvage value at the end of 10 years. The machine will be used to generate net cash inflows of $40,000 per year in each of the 10 years. XYZ Company has a cost of capital of 8% Calculate the net present value (NPV) of this machine. If your answer is negative, place a minus sign in front of your answer with no spaces in between Ce.g., -1234). Do not use decimals in your answer. You will need to use the time value of money table factors posted in can vas to answer this question. To access these factors, click modules and then scroll to week 7. Click on the link labeled present& future value table factors. No credit will be awarded for this question using a means other than these table factors to answer this questionExplanation / Answer
Net Present Value = Present Value of Inflows - Present Value of Outflows
Present Value of inflows = Present Value of annuity of $ 40,000 for 10 Years @ 8% + Present value of salvage of $ 15,000 at the end of year 10 @ 8% + Present value of release of working capital of $ 35,000 at the end of year 10 @ 8%
= ($ 40,000 * 6.7101) + ( $ 15,000 * 0.4632) + ($35,000 * 0.4632)
= $ 268,404 + $6,948 + $16,212
= $ 291,564 (A)
Present Value of outflows = Present value of cost of machine and working capital investment on today + Present value of cost of maintenance of $ 25,000 at year 3 and year 6 @ 8%
= $ 200,000 + $ 35,000 + ( $25,000 * 0.7938) + ($25,000 * 0.6310)
= $ 270,620 (B)
Therefore,
Net present value = (A) - (B)
= $ 291,564 - $ 270,620
= $ 20,944
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