XYZ Company is considering the purchase of a new machine. The machine will cost
ID: 2578599 • 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 CNPV) 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 canvas 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
Calculation of Net present value of cash flows
Particulars
Amount (In $)
(A)
Time(n)
Present Value Factor (1/ (1.08)n), i=8%
(B)
Present Value Amount (In $)
(A x B)
Cash Outflows:
Initial Investment
200,000
0
1
200,000
Working capital requirement
35,000
0
1
35,000
Maintenance cost at year3
25,000
3
0.7938
19,845
Maintenance cost at year6
25,000
6
0.6301
15,753
Present Value of cash outflows
270,598
Cash Inflows:
Cash Inflows for 10 years
40,000
1-10
6.71
268,400
Release of Working capital
35,000
10
0.4632
16,212
Salvage value of machine
15,000
10
0.4632
6,948
Present Value of cash inflows
291.560
Net Present Value
20,962
Note: In the given case, tax rate is not given and therefore tax savings on depreciation is not considered for NPV calculation.
Particulars
Amount (In $)
(A)
Time(n)
Present Value Factor (1/ (1.08)n), i=8%
(B)
Present Value Amount (In $)
(A x B)
Cash Outflows:
Initial Investment
200,000
0
1
200,000
Working capital requirement
35,000
0
1
35,000
Maintenance cost at year3
25,000
3
0.7938
19,845
Maintenance cost at year6
25,000
6
0.6301
15,753
Present Value of cash outflows
270,598
Cash Inflows:
Cash Inflows for 10 years
40,000
1-10
6.71
268,400
Release of Working capital
35,000
10
0.4632
16,212
Salvage value of machine
15,000
10
0.4632
6,948
Present Value of cash inflows
291.560
Net Present Value
20,962
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