Question

a. Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.14 million and create incremental cash flows of $688,378.00 each year for the next five years. The cost of capital is 10.79%. What is the net present value of the J-Mix 2000? round to 2 decimal places

b. Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.98 million and create incremental cash flows of $591,438.00 each year for the next five years. The cost of capital is 9.69%. What is the profitability index for the J-Mix 2000? round to 3 decimal places

Answer 1

a. Net present value = Present value of cash flows - Initial investment

Net present value = $688,378.00(PVIFA  10.79%,5) - $1,140,000

Net present value = ($688,378.00 * 3.7155045437) - $1,140,000

Net present value = $1,417,671.59

b. Profitability index = Present value of cash flows / Initial investment

Profitability index = $591,438.00(PVIFA 9.69%,5) / $1,980,000

Profitability index = ($591,438.00 * 3.82099969143) / $1,980,000

Profitability index = 1.141