Question

Elmsford Industries had the opportunity to invest $90,000 in a new packaging machine that should provide annual cash operating inflows of $29,000 for six years. At the end of that period it can be sold for $10,000. Elmsford’s required rate of return is 14%.

Required:

a. What is the machine’s net present value?

b. Based on the NPV you have calculated in (a) above, should the management of Elmsford invest in the new machine?

c. What other qualitative information should be considered in marking this decision?

Answer 1

year	particulars	cash flow	Present value
0	investment	-90000	-90000.00
1	operating inflows	29000	25438.60
2	operating inflows	29000	22314.56
3	operating inflows	29000	19574.17
4	operating inflows	29000	17170.33
5	operating inflows	29000	15061.69
6	operating inflows	29000	13212.01
6	sale value	10000	4555.87
			27327.22
As the NPV is positive the compay should invest in new machine
The other information should be considered is that the annual operating cash flows and sale value of the asset may varry plus or minus what is estimated.
This will impact the decision.