Question

Baird Bros. Construction is considering the purchase of a machine at a cost of $139,000. The machine is expected to generate cash flows of $30,000 per year for 10 years and can be sold at the end of 10 years for $20,000. Interest is at 12%. Assume the machine purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: a. What is the net present value of the cash flows? b. Determine whether Baird should purchase the machine.

Answer 1

A ) NET PRESENT VALUE

Net Present Value = Discounted cash Inflows - Discounted Cash Outflow

Purchase of Machine is a cashoutflow of $ 139000

Therefore Discounted cash outflow = $ 139000

Discounted cash Inflow = $ 30000 * 5.6502

  = $ 169506

( 5.6502 is the grand total 0f pv of 12 % for 10 years )   

Cash Inflow at the tenth year = $ 20000

Discounted Cash INflow for 10th year = $ 20000 * .3220

= $ 6440

  

Total discounted cash Inflow = $ 169506 + $ 6440

= $ 175946

NET PRESENT VALUE

NPV = Discounted cash Inflows - Discounted Cash Outflow

= $ 175946 - $ 139000

= $ 36946

B) Decision

Since Discounted cas inflow is greater than Discounted cash outflow (ie) NPV is in Positive of $ 36946

Baird can purchase the machine.