20. EIA Limited is considering the acquisition of a machine to produce computers

Question

20. EIA Limited is considering the acquisition of a machine to produce computers. The machine will cost $60,000 today and will produce a positive cash flow of $25,000 per year at the end of each year for three years starting at the end of year 1. At the end of three years the project will cease and the machine will be sold for $1,000. The company expects a rate of return of 12 per cent per annum on this type of project. Calculate the NPV of this project. A. None of the given answers B. $757.56 $938.64 D. ($52,082.73) 03

Explanation / Answer

NPV: of annual cash inflows = 25000*(1.12^3-1)/(0.12*1.12^3) = $       60,045.78 PV of salvage value = 1000/1.12^3 = $             711.78 Total PV of cash inflows $       60,757.56 Less: Initial cost $       60,000.00 NPV $             757.56

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