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

 012345

Outflows

 (96000)

 (3000)

Inflows

25000 250002500025000

35000

Net CF

(96000)25000250002200025000

35000

Dis. factor

10.909 0.8260.751 0.683

0.621

 (96000)22,725 2065016522 17075

21735

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

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

Leave a Reply

Your email address will not be published. Required fields are marked *


x

Related Posts

Evaluation of Transfer Pricing Policies
Introduction When one department of company manufactures some product which is supplied to another department of the company, transfer pricing i...
What is financial reconstructing
When a company cannot pay its cash obligations - for example, when it cannot meet its bonds payment or its payments to other creditors it goes ba...
Coffee Maker's Incorporated (CMI) - Transfer Pricing Example
Coffee Maker's Incorporated (CMI)Two divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Par...
powered by RelatedPosts