Question

King’s Department Store is contemplating the purchase of a new machine at a cost of $22,000. The machine will provide $3,500 per year in cash flow for nine years. King’s has a cost of capital of 10%. Calculate NPV of the project.

Answer 1

NPV for a time period of n can be calculated using the formula: -C+C1/(1+r)+C2/(1+r)^2+....Cn/(1+r)^n; where C is the initial investment, C1 to Cn are cash inflows and r is the required rate of return

NPV of the Project= -22000+3500/1.1+3500/1.1^2+.....3500/1.1^9

we can use present value of annuity formula for cashinflows which is P*(1-(1+r)^-n)/r; where P is the annual cashflow, r is the discount rate and n is the number of years

NPV= -22000+ 3500*(1-1.1^-9)/0.1

NPV= -$1843.42