Samson | |||
Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost | |||
$920,000.00 | |||
Projected net cash inflows are as follows: |
$ 260,000 | year 1 |
$ 254,000 | year 2 |
$ 225,000 | year 3 |
$ 214,000 | year 4 |
$ 202,000 | year 5 |
$ 177,000 | year 6 |
what is the net present value? Should we do this project?
Year | Inflow | Discount rate 16% | Present Value |
Year 1 | 260000 | 0.862 | 224120 |
Year 2 | 254000 | 0.743 | 188722 |
Year 3 | 225000 | 0.641 | 144225 |
Year 4 | 214000 | 0.552 | 118128 |
Year 5 | 202000 | 0.476 | 96152 |
Year 6 | 177000 | 0.41 | 72570 |
843917 | |||
Total PV of cash inflow | 843917 | ||
Total PV of cash outflow | 920000 | ||
Net PV | -76083 | ||
Since, NPV is loss, therefore, project should not be accepted | |||
( Note, I have taken disc rate as 16%. In the given question, disc rate is silent) | |||
Therefore, if disc rate is not 16% then change 16 to that per cent. | |||
How to calculate disc rate | |||
For year 1 | Disc rate = 1/(1.16) | ||
For year 2 | Disc rate = 1/(1.16)^2 |
I hope this satisfies the answer. |
In case of doubt, please comment. Also, it would be great in case you give thumbs up. |
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