Question

Option to Wait: Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $375,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $2,100,000. The cost of the machine will decline by $150,000 per year until it reaches $1,350,000, where it will remain. If your required return is 12%, should you purchase the machine? If so, when should you purchase it? Can you please show the inputs in the BA II Finance calculator?

Answer 1

The problem is solved using NPV method. The NPV table is as follows

Year	Cost	Number of years life	P/A factor	PV of Cash inflows	NPV
0	-2100000	10	5.65	2118750	18750
1	-1950000	9	5.328	1998000	48000
2	-1800000	8	4.968	1863000	63000
3	-1650000	7	4.564	1711500	61500
4.0000	-1500000	6	4.111	1541625	41625
5	-1350000	5	3.605	1351875	1875

The machine should be purchased in year 2 when its NPV is the highest.

The calculations are as below. Year represents the year of purchase. P/A factor is taken from the compound interest tables.