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.

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

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