Question

James Googal owns a garage and is contemplating purchasing a tire retreading machine for $10,000. After estimating costs and revenues, James projects a net cash inflow from the retreading machine of $2,200 annually for 5 years. James hopes to earn a return of 7% on such investments. What is the present value of the retreading operation? Should James Googal purchase the retreading machine? (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (Round answer to 2 decimal places, e.g. 15.25.) Click here to view the factor table.

(a) The present value of the retreading operation is ______ .

(b) James Googal (should or should not) purchase the retreading machine.

Answer 1

Investment decision is by using NPV method. NPV is possitive he can buy the machine. Otherwise no need to Buy.

Initial cost (Out flow) = $ 10,000

Inflow for 5 years = $ 2,200 for 5 years

NPV = present value of cash inflow - Present value of cash inflow

i am unable to see the factor table provided. So iam calculating factor table of 7% ,so it may have small fraction difference.

Year 1 -- 0.9346

Year 2 -- 0.8734

Year 3 -- 0.8163

Year 4 -- 0.7630

Year 5 -- 0.7130

Cumilative factor for 5 year = 4.1003

(a)

PV of cash inflow = $ 2200*4.1003 = $ 9022.66

NPV = PV of inflow -PV of out flow = $ 9022.66 -$ 10000 = - 979.34

(b)  James Googal should not purchase the retreading machine. Because it is having a Negative NPV. Negative NPV means this option is not financially viable