Question

# An engineer proposes to buy a machine for \$1,200,000 today that will save \$500,000 in labor...

An engineer proposes to buy a machine for \$1,200,000 today that will save \$500,000 in labor costs at the end of each of the next 3 years. If the company demands a 12% retum on investments such as this, what is the net present worth (NPW) of the proposal? Should it be funded?

Formula to calculate Net present worth (NPW) of Investment

Net present worth (NPW) = Cost saving of year 1/ (1+ r) ^1 + Cost saving of year 2/ (1+r) ^2 + Cost saving of year 3/ (1+ r) ^3 – Initial Investment (cost of machine)

Where r is the requited rate of return on investment = 12%

Therefore,

NPW = \$500,000/ (1+0.12) ^1 + \$500,000/ (1+0.12) ^2 + \$500,000/ (1+0.12) ^3 - \$1,200,000

= \$446,428.57 + \$398,596.94 + \$355,890.12 -\$1,200,000

= \$1,200,915.63 - \$1,200,000

NPW = \$915.63

The Net present Worth (NPW) of the proposal is \$915.63, as the NPW is positive therefore the proposal should be funded.

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