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.