NPV Calculation Example

NPV Calculation Example

Watson manufacturing has an opportunity to invest $96,000 in a new machine. The new machine will result in cost savings of $25,000 in year 1, $25,000 in year 2, $25,000 in year 3, $25,000 in year 4, and $25,000 in year 5.  The new machine will require a tune-up in year 3 costing $3,000.   The salvage value of the machine will be $10,000 at the end of year 5.  Watson’s cost of capital is 10%.  Create a table showing the cash flows in each year of the project and compute the NPV.


Year

 0 1 2 3 4 5

Outflows

 (96000)

 (3000)

Inflows

25000  25000 25000 25000

35000

Net CF

(96000) 25000 25000 22000 25000

35000

Dis. factor

1 0.909  0.826 0.751  0.683

0.621

 (96000) 22,725  20650 16522  17075

21735

NPV = 22725+20650+16522+17075+21735 – 96000 = $2707

The NPV is:  $2707, hence the investment acceptable.

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