Question

Herky Foods is considering acquisition of a new wrapping machine. By purchasing the​ machine, Herky will save money on packaging in each of the next 5​ years, producing the series of cash inflows shown in the following​ table:
1 371,200
2 348,000
3 278,400
4 324,800
5 185,600

The initial investment is estimated at ​$1.161.16 million.

Using a

88​%

discount​ rate, determine the net present value​ (NPV) of the machine given its expected operating cash inflows. Based on the ​project's NPV​, should Herky make this​ investment?

Answer 1

.Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$1,161.16 million. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 8%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 8% discount rate is -$1,159,931,886.

Herky should not make the investment since the investment generates a negative net present value.