A company is considering an investment (at time = 0) in a machine that produces

Question

A company is considering an investment (at time = 0) in a machine that produces pans. The cost of the machine is 46606 dollars with zero expected salvage value. Annual production in units during the 3-year life of the machine is expected to be (starting at time = 1) 4572, 7234, and 10258. The sale price per pan is 14 dollars in year one, and then expected to increase by 5% per year. Production costs per unit will be 6 dollars in year one, and then expected to increase by 5% per year. Depreciation on the machine is 13656 dollars per year, the tax rate is 40% and the minimum acceptable rate of return is 15% percent. Calculate the net present value of this investment. Assume all flows are at the end of each year.

Explanation / Answer

PV of year 1 revenues

( 4572 * ( 14 - 6 ) + 13656 * 0.4 ) / 1.15 = 36555.13

PV of year 2 revenues

( 7234 * ( 14 - 6 ) * 1.05 + 13656 * 0.4 ) / 1.15^2 = 50077.88

PV of year 3 revenues

( 10258 * ( 14 - 6 ) * 1.05 * 1.05 + 13656 * 0.4 ) / 1.15^3 = 63080.77

Inital flow = -46606

NPV = 36555.13 + 50077.88 + 63080.77 - 46606 = 103107.78

I dont think the answer is 48,112.02

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