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Mayberry Textiles Inc. is considering the purchase of a new machine which has an initial cost of $400,000. Annual operating cash inflows are expected to be $100,000 each year for eight years. No salvage value is expected at the end of the asset's life. Mayberry's cost of capital is 14 percent. Compute the net present value of the machine. (Ignore income taxes)

Guest Mar 15, 2017
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Mayberry Textiles Inc. is considering the purchase of a new machine which has an initial cost of $400,000. Annual operating cash inflows are expected to be $100,000 each year for eight years. No salvage value is expected at the end of the asset's life. Mayberry's cost of capital is 14 percent. Compute the net present value of the machine. (Ignore income taxes).

 

First, you have to find the PV of the 8 cash inflows @ 14% using this formula:

PV=P{[1 + R]^N - 1.[1 + R]^-N} R^-1

PV =100,000 x {[1.14]^8 - 1 / [1.14]^8 / 0.14}

PV =100,000 x                  4.63886389.....

PV =$463,886.39 - This is net PV of the 8 cash inflows.

 

Second, you subtract the initial cost of $400,000 from above PV.

$463,886.39 - $400,000 =$63,886.39 - This is the "Net Present Value of the Machine".

Guest Mar 15, 2017

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