Question

Pittsburgh Custom Products (PCP) purchased a new machine for ram-cambering large I beams. PCP expects to bend 80 beams at $2,000 per beam in each of the first 3 years, after which it expects to bend 100 beams per year at $2,500 per beam through year 8. If the company’s minimum attractive rate of return is 18% per year, what is the present worth of the expected revenue?

Answer 1

The formula for the Net Present Value is: FV/(1+r) + FV/(1+r)^​2 +....+ FV/(1+r)ⁿ

​The cash flows are: Year 1,2,3 : $16000 per year ; Year 4,5,6,7,8 : $250000 per year

NPV = 160000/(1+0.18) +160000/(1+0.18)² + 160000/(1+0.18)³ ​+ 250000/(1+0.18)⁴​ + 250000/(1+0.18)⁵​+    250000/(1+0.18)⁶ + 250000/(1+0.18)⁷ +250000/(1+0.18)⁸

NPV = 157170.923 + 154395.45 + 97382.84 + 128932.44 + 109313.51 + 92592.59 + 78492.93 + 66510.59

= $884791.273

Ans: The Net Present Value of the expected revenues of the next 8 years is $884792.273 .