Question

1. A business owner is considering to buy a machine now costing £75,000. The cash revenues that could be accrued for the use the machine for the next three years is £27,000, £35,000 and £28,000. The is a maintenance cost of £5,000 at the end of the second year. The discount rate is 10%. Using a straight-line reducing method, the annual depreciation of the machine is expected to be £10,500.  Calculate the NPV of the project. No tax rate is required

   	A.	£11,550
   	B.	-£11,550
   	C.	£28,060
   	D.	£10,040
   	E.	£53,550

Answer 1

Ans C. £28,060

Since no tax is there, calcuation of depreciation for purpose of capital budgeting decision is not necessary

however salavge value of machine can be found using depreciation

Depreciation = Cost of machine - Salvage value / No of years

10500 = 75000 - Salvage value /3

31500 = 75000 - Salvage Value

Salvage value = 43500 £

Statement showing NPV

Particulars	0	1	2	3	NPV = Sum of PV
Cost of Machine	-75000
Cash Revenue		27000	35000	28000
Maintenance cost			-5000
Salvage value of machine (WN 1)				43500
Total cash flow	-75000	27000	30000	71500
PVIF @ 10%	1	0.9091	0.8264	0.7513
PV	-75000	24545	24793	53719	28060

Thus NPV = £ 28060

i.e 28060 £