Saturday

November 22, 2014

November 22, 2014

Posted by **A** on Sunday, November 4, 2007 at 8:58pm.

ANSWER: Net Present Value=$168609.42

Question 2: You want to buy new machine and replace the existing machine, which you have used for the past 3 years. New machine costs $75000 and will be useful for 5 years after which can be sold to fetch salvage value of $9000. New machine will be depreciated straight-line to 0 over 5 years. Old machine was bought for $70000 and also depreciates straight-line to 0 over 5 years. Old machine can be sold today for $30000 but if you wait for 5 years, it will only worth $6500.

New machine is efficient. Annual savings in operating costs are $12000. Your net working capital requirement will decline annually by $4000. Tax rate is 35% and capital cost rate is 12%. Find the NPV

ANSWER: Net Present Value(replacing)=$9598.75

Please show me detailed step-by-step solutions. Thanks.

- Finance -
**economyst**, Monday, November 5, 2007 at 10:04amAn excel spreadsheet is very handy for these types of analyses. I'll do the first one, which should give you a process for working the second.

First calculate the net present value for the cash flows for years 0 to 10.

0 = -100000/(1.08^0) = -100000

1 = 0

2 = 0

3 = 16000/(1.08^3) =

4 = (16000*1.15)/(1.08^4)

....

9 = 26875.93/(1.08^9)

10 = 26875.93/(1.08^10)

Now then year 10's PV flows forever, but declining by 8% per year. With this infinite expansion, the multiplier is simply 1/.08 = 12.5

So, years 11 and beyond = (PV in year 10)*12.5

Sum the PV's for years 0 to 11+ and you should get 168609.42

**Answer this Question**

**Related Questions**

Finance - A U.S.-based firm is planning to make an investment in Europe. The ...

Business finance - Question No 1: Sumi Inc. has policy of paying a Rs. 9 per ...

Finance - Wheel Industries is considering a three year expansion project. The ...

finance - I'm having a terrible time understanding how to estimate cash flow. My...

Finance / Business - Can you please tell me if I am right on this? I believe the...

finance - Wheel Industries is considering a three-year expansion project. The ...

Finance - Q1:You wish to start a sproject.Your initial investment is$100000. You...

finance - What is the payback period of the following project? Initial ...

Finance - FIN500, Inc. has the following project. It is a 4 year project and ...

Finance - Your firm is looking at a new investment opportunity, Project Alpha, ...