Question

Please show long calculation (Please do not use excel)

Your company can borrow at 6%. You can upgrade your computers for $12,000. You estimate that this upgrade will increase company cash flow by $6000/yr. for the next three years. Calculate the NPV of this acquisition. If you decide that you should do this project (if the NPV is positive), show that you can make interest and principal payments with the increased cash flows generated by these new computers.

Answer 1

PV =12000
Rate =6%
Cash flows in year 1=6000
Cash flow in year 2 =6000
Cash flow in year 3 =6000
NPV =PV of Cash flows -PV of Costs =Cash flow*((1-(1+r)^-n)/r)-12000 =6000*((1-(1+6%)^-3)/6%)-12000 =4038.07
Since NPV is positive go ahead with the project.


PV of Loan amount =12000 (amount used to upgrade computer)
Rate =6%
Number of Years =3
PMT =PV/((1-(1+r)^-3)/6%) =12000/((1-(1+6%)^-3)/6%) =4489.32
PMT includes principal and interest payment and this value is less than 6000 so it case easily pay off its loan amount.