Crescent Industries management is planning to replace some existing machinery in

Question

Crescent Industries management is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses an 18 percent discount rate for projects like this.

What is the NPV of this project? (Enter negative amounts using negative sign e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.)

$

Should management go ahead with the project?

Year Cash Flow 0 -$3,333,000 1 $839,910 2 $953,600 3 $1,187,500 4 $1,371,060 5 $1,486,900

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=839910/1.18+953600/1.18^2+1187500/1.18^3+1371060/1.18^4+1486900/1.18^5

=$3476513.16(Approx)

NPV=Present value of inflows-Present value of outflows

=$3476513.16-$3,333,000

=$143513(Approx)

Hence since NPV is positivelthe project should be accepted.

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