Question

ABC Carpet company will purchase a carpet weaving loom. The purchase price is 250000 TL, the salvage value is 25000 TL, the economic life is 10 years, and the net cash inflows it provides annually are 87000 TL. Since the company's capital cost is 35%, would you recommend buying this machine?

Answer 1

Given Values

Purchase price (P) = 250000 TL

Salvage value (S) =25000TL

Life = 10 years

Annual Inflow (A) = 87000 TL

I = 35%

Let us estimate the net present worth for the machine and if the present worth is positive the machine can be bought since the benefits are more than the costs.

Net Present worth = Present worth of benefits – Present worth of cost

Net Present worth = 87000(P/A,35,10) + 25000(P/F,35,10) – 250000

Using DCIF tables

Net Present worth = 87000(2.715) + 25000(0.0497) – 250000

Net Present worth = -12552.5 TL

Since the Net Present worth is negative, the machine cannot be bought.