Financial AccountingFinancial Management

Net Present Value (NPV) Calculation Example

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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.

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