Question

Jiayao is evaluating a new machine costing $6,000 today. The machine should save the company $3,400 (cash inflow) annually for each of the next two years. As a result of a $1400 overhaul of the machine (cash outflow) at the end of the 2nd year, a savings of $4200 (cash inflow) will be realized in year 3. All cash flows are after tax. What is the NPV of this machine if the firm’s cost of capital is 11 percent? Also, please show how to entering number in financial calculator HP 10bII+

Answer 1

The relevant cash flows are as below:

Year 0 (current) : - $6000 (minus denotes outflow)

Year 1 : $3400 (annual savings)

Year 2 : $3400 - $ 1400 (overhaul outflow adjusted) = $ 2000

Year 3 : $ 4200

Discount rate : 11%

NPV = -6000 + 3400/(1+11%) + 2000/(1+11%)² + 4200/(1+11%)³ = $1757.31

For the financial calculator:

• First make adjust the payment per year to 1 - press 1, then orange bar and then press P/Yr (near the top)
• Input the numbers - first -6000 and then press CF_j button, then enter 3400 & press CF_j and so on for 2000 and 4200 (followed by CF_j in each case)
• The input discount rate 11%, press orange bar and then I/Yr button
• In the end press orange bar and press NPV and it will give the output