Question

Your Company purchased a machine with an estimated useful life of 8 years. The machine will...

Your Company purchased a machine with an estimated useful life of 8 years. The machine will generate cash inflows of $96,000 each year. The salvage value at the end of the project is $80,000. Your Company's discount rate is 6%. The net present value of the investment is ($7,500). What is the purchase price of the machine?

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Answer #1

Purchase price of machine = ?

Annual cash inflow = $96,000

Useful life = 8 year

salvage value = $80,000

Net present value = $7,500

Present value of cash inflow = Annual cash inflow x Present value annuity factor (i%, n) + salvage value x Present value factor (i%, n)

= 96,000 x Present value annuity factor (6%, 8) + 80,000 x Present value factor (6%, 8)

= 96,000 x 6.20979 + 80,000 x 0.62741

= 596,140 + 50,192

= $646,332

Net present value = Present value of cash inflow - Purchase price of machine

7,500 = 646,332 - Purchase price of machine

Purchase price of machine = 646,332 - 7,500

= $638,832

purchase price of the machine = $638,832

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