Question

Fraiser International has decided to purchase a pressing machine for Rs. 1,000,000. The machine is expected...

Fraiser International has decided to purchase a pressing machine for Rs. 1,000,000. The machine is expected to generate a cash flow of Rs. 25,000 per month and requires a monthly cost of Rs. 8,000 to run. The expected useful life of the machine is 15 years with no salvage value. The discount rate is 8%. Please calculate NPV and advise Fraiser International about WHY they should invest or reject the project.

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Answer #1

Calculation of NPV

Net Present Value = Present value of cash Inflow - Present value of cash outflow

Given

Present value of cash outflow = 1,000,000

As cash inflows are given in months therefore Monthly cash inflows are dicounted using monthly rate

Monthly rate = [( 1 + Annual rate)^(1/12)] - 1

= [(1 + 0.08)^(1/12)] - 1

= 1.006434 - 1

= 0.006434 or 0.64%

Number of Months = 15 * 12 = 180 months

Calculation of Present value of Cash Inflow:

Present value of Cash Inflow = Annual Cash Inflow * PVAF @0.64% for 180 months

= (25000 - 8000) * 106.6928

= 17000 * 106.6928

= 1,813,777

Net Present Value = 1,813,777 - 1,000,000

= 813,777

Fraiser International Should invest in project since it has positive NPV.

PVAF can be calculated as {[1 - (1 + 0.0064)-180 ] / 0.0064} = 106.6928

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