Financial AccountingFinancial Management

# 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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