Question

A company is evaluating the acquisition of a machine. The alternatives you have are two. The data is shown in the following table. Find the net present value of machine Y.  (DISCOUNT RATE IS 10%)

Concept                        Machine Y
Initial Cost                  ($) - 46,000
Annual cost ($ / year)         - 15,000
Salvage Value ($)              24,000
Life in years                  3

Answer 1

Solutions:-

Initial Cost = -$46,000

Annual Cost = -15,000 ($/year)

Salvage Value = $ 24,000

Life of machine = 3 years

Discounting rate = 10%

Net present value of Machine y = ?

Now,  

Using Net present value formula

Year	Cash Flow	DF@10%	PV
0	-46000	1	-46000
1	-15000	0.909	-13635
2	-15000	0.826	-12390
3	-15000	0.751	-11265
3	24000	0.751	18024
		NPV	-65266

So, Net Present value is $-65226 for Mechine Y.

Note:- DF = Discountin Factor , PV = Present Value and NPV = Net Present Value

Formula for DF is (1 + r)^n and PV is Cash flow * DF.