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.







25000 250002500025000


Net CF



Dis. factor

10.909 0.8260.751 0.683


 (96000)22,725 2065016522 17075


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Your email address will not be published.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 *


Related Posts

Meaning of Ad Valorem
“Ad valorem” is derived from a ‘latin’ word which means ‘according to value’. Ad valorem is a tax or a duty levied by the state, local or municip...
Dependent and Independent Investments
In evaluating the investment proposals presented to management, it is important to be aware of the possible interrelationships between pairs of ...
Audit, Assurance and Compliance - A case study of BHP Billiton
Executive SummaryThe report has provided an insight into the annual report of BHP Billiton for the assessing, analysing and evaluating the r...
powered by RelatedPosts