Question

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.40 million and create incremental cash flows of $799,570.00 each year for the next five years. The cost of capital is 8.89%. What is the net present value of the J-Mix 2000?

Answer 1

Net Present Value

= Present value of Inflows – Present value of outflows

When cash inflows are fixed, we can use annuity factor to calculate present value of inflows

Annuity factor

= [ 1 – ( 1 + r ) ^ -n] / r

Where,

r = Rate of interest = 8.89% or 0.0889

n = Number of years = 5

So, Annuity Factor

= [ 1 – ( 1.0889 ^ - 5)] / 0.0889

= [ 1 - 0.653221] / 0.0889

= 3.900778

So, Present value of inflows

= Inflows each year x Annuity Factor

= $799,570 x 3.900778

= $3,118,945.31

So, Net Present Value

= $3,118,945.31 - $1,400,000

= $1,718,945.31