Question

Your friend in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $800. ​However, once​ built, the machine will last forever and will require no maintenance. The machine can be built​ immediately, but it will cost $8,000 to build. Your friend wants to know if he should invest the money to construct it. If the interest rate is 4.5% per​ year, what should your friend​ do?

If possible, please show work on spreadsheet.

Answer 1

Present Value = $8000 ( Money Invested on Macine)

Cash Flows = $800 , discount rate = $4.5%

​PV=C/(1+r)^11​+C/(1+r)^2​+C/(1+r)^3⋯=C/r where:PV=present value, C=cash flow , r=discount rate​

Money Machine Produces till Perpetuity = Cash Flow Per Year/ Interest Rate = 800/.045 = $17777.78 ,

Net Present Value = $17777.78 - $8000 = 9777.78,

Since Net Present Value of the investment is positive, friend should invest on money machine.

let me know if you need further explanation. happy to help