XYZ Company is considering the purchase of a new machine. The machine will cost

Question

XYZ Company is considering the purchase of a new machine. The machine will cost $200,000 and is expected to last 10 years. However, the machine will need maintenance costing $25,000 at the end of year three and at the end of year six. In addition, purchasing this machine would require an immediate investment of $35,000 in working capital which would be released for investment elsewhere at the end of the 10 years. The machine is expected to have a $15,000 salvage value at the end of 10 years. The machine will be used to generate net cash inflows of $40,000 per year in each of the 10 years. XYZ Company has a cost of capital of 8%. Calculate the net present value (NPV) of this machine. If your answer is negative, place a minus sign in front of your answer with no spaces in between (e.g., -1234). Do not use decimals in your answer. You will need to use the time value of money table factors posted in canvas to answer this question. To access these factors, click modules and then scroll to week 7. Click on the link labeled present & future value table factors. No credit will be awarded for this question using a means other than these table factors to answer this question.

Explanation / Answer

First, we compute the Present value of cash outflows -

Now, we compute the Present value of Cash Inflows -

NPV = PVCI - PVCO = $291563 - $270600 = $20963

You should look for the present value factors in the table. I have computed them as 1 (1 + r)n where, r is the interest rate and n being the year for which it is calculated. Also, for $40000 per year cash inflows, I have take present value interest factor annuity (PVIFA) for years 1 to 10. It is computed as the sum of present value factors for years 1 to 10 or in case you have the annuity table with you, just look for the value in year 10.

Present Value of Cash Outflows (PVCO) Particulars Year PVF@8% (a) Amount (b) Present Value (a x b) Cost of Machine 0 1 $200000 $200000 Add: Working Capital required 0 1 $35000 $35000 Add: Maintenance Cost 3 0.793832241 $25000 $19846 6 0.63016962685 $25000 $15754 PVCO $270600

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