10.2) Net Present Value: Kingston, Inc., is looking to add a new machine at a co

Question

10.2) Net Present Value: Kingston, Inc., is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cash flows of $814,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment?

10.6) Payback: Refer to Problem 10.5. What are the payback periods for production systems 1 and 2? If the systems are mutually exclusive and the firm always chooses projects with the lowest payback period, in which system should the firm invest?

>>> 10.5 :

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

NPV = -4133250 + 814322/(1+.15)^1 + 863275/(1+.15)^2 + 937250/(1+.15)^3 + 1017112/(1+.15)^4 + 1212960/(1+.15)^5 + 1225000/(1+.15)^6 = -441933.01

Part B:

System 1 Payback Period = 15000 (Initial Investment)/15000 (Annual Cash Flow) = 1 year

System 2 Payback Period = 45000 (Initial Investment)/32000 (Annual Cash Flow) = 1.41 years

Thanks

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