The yard manager wants to purchase a new machine for $600,000 (total cost includ

Question

The yard manager wants to purchase a new machine for $600,000 (total cost including delivery, installation and tax). Estimates it will save $110,000 a year for 7 years, with a residual value of $25,000 after 7 years. Required (a): Using NPV analysis, with the company's required rate of return of 7%, should the purchase be approved? (ignore depreciation tax impact) Show NPV calculation in table format by year or using annuity for years 1 - 7. 7% Year Amount Factor NPV 0       600,000 The yard manager wants to purchase a new machine for $600,000 (total cost including delivery, installation and tax). Estimates it will save $110,000 a year for 7 years, with a residual value of $25,000 after 7 years. Required (a): Using NPV analysis, with the company's required rate of return of 7%, should the purchase be approved? (ignore depreciation tax impact) Show NPV calculation in table format by year or using annuity for years 1 - 7. 7% Year Amount Factor NPV 0       600,000

Explanation / Answer

Calculate Net present value :

Purchase should be approved.

Year Amount factor Present value 0 (600000) 1 (600000) 1-7 110000 5.3893 592823 7 25000 0.6228 15570 Net present value 8393

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