Question

The cash flows for a machine are CF0 = -16,500, CFj = 5225 for (j =...

The cash flows for a machine are CF0 = -16,500, CFj = 5225 for (j = 1,2,3,4). Determine how acceptable this machine is economically at the rate of 8% versus 12% per year, compounded annually?

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Answer #1

The machine is acceptable at 8% since it results in a positive NPV.

The machine is not acceptable at 12%, since the NPV at this rate is negative.

  • Present value of annuity factor (PVAF) is calculated as follows:
  • PVAF = (1-(1+r)^-n)/r
    • r = rate of interest or discounting rate
    • n = number of periods of compounding
  • PVAF (4 years, 8%) = (1-(1.08)^-4)/0.08 = 3.3121
  • PVAF (4 years, 12%) = (1-(1.12)^-4)/0.12 = 3.0373
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