Comprehensive Financial Statement Analysis Part 2 - Q2 (a) - (b) The yard manage

Question

Comprehensive Financial Statement Analysis Part 2 - Q2 (a) - (b) 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

Explanation / Answer

CF0=-600000

CF1 to CF6=110000

CF7=110000+25000=135000

Using calculator,

NPV=$8390.

Thank you.

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