Question

Muncy, Inc., is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cash flows of $816,322, $863,275, $937,250, $1,019,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? Round to two decimal places.

Answer 1

Calculation of NPV of the Investment:

NPV = Cash inflows - Cash Outflows

Calculation of Cash inflows:

Year	Cash flows (1)	Discount rate @15% (2)	Discounted Cash flows (3) (1*2)
1	816,322	1/1.15=0.869	709,384
2	863,275	1/(1.15)^2=0.756	652,636
3	937,250	1/(1.15)^3=0.657	615,773
4	1,019,112	1/(1.15)^4=0.572	582,932
5	1,212,960	1/(1.15)^5=0.497	602,841
6	1,225,000	1/(1.15)^6=0.432	5,292,00
		Cash inflows	3,692,766

Cash outflows = 4,133,250

NPV = Cash inflows - Cash Outflows

= 3,692,766-4,133,250

= -440,484

Since NPV is negative it is not advisable to make investment.