Question

# Option to Wait: Your company is deciding whether to invest in a new machine. The new...

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?

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.

#### Earn Coins

Coins can be redeemed for fabulous gifts.