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x/Cannect 0 OreLogin × \\\'D Simple inte, x.MMHE Reader xe Grammarly x CO. Secure! https://newconnect.mheducation.com/flow/ i New Tab (1) IRR Rule xv G what is ptx we Are Eva: × × connect.html Upscom, usps i (9 Homepage-Mid-A-- Pay Bill, See Offers, CPNC Bank-Online E Messaging l LinkedIn D Cengage ran-My Check my work mode : This shows what is correct or incorrect for the work you have completed so far. t does not Return to question 4 Your company is deciding whether to invest in a new machine. The new machine will increase cash f believe the technology used in the machine has a 10 year life;, in other words, no matter when you p year until it reaches $1140,000, where it will remain. If your required return is 13 percent, calculate the NPV if you purchase the machine today. (Do not roun st of the machine will decline by $102.000 per 10 points d intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) NPV $ s 13 percent, calculate the NPV if you wait to purchase the machine until the indicated year. (A negetive answer d be indicated by a minus signDo not round intermediate calculations and round your answers to 2 decimal places, e.g. shoul 32.16.) NPV Year 1 ear 2 Year 3 Year Year 5 Year 6 Should you purchase the machine? Pre 4 of 5Next O Type here to search

Solution

There are two ways of solving the question.

a) Considering deprecition

b) Without depreciation

a) Considering depreciation NPV will be

= 310000 (Cash flow) - 31000 (Depreciation, 310000/10) * 3.3946 (Interest rate 1.13 for 10 years i.e 1.13*1.13*1.13*1.13*1.13*1.13*1.13*1.13*1.13*1.13)

= 947084

= 947084 - 1650000 (cost of machine)

= -702915

So NPV is negative 702915.

b) Without depreciation NPV will be

= 310000 (Cash flow) * 3.3946 (Interest rate 1.13 for 10 years i.e 1.13*1.13*1.13*1.13*1.13*1.13*1.13*1.13*1.13*1.13)

= 1052316

= 1052316 less 1650000 (cost of machine)

= -597684

So, without depreciation NPV is negative 597684.

NPV if machine is purchased at given years:-

We are solving the question without considering the depreciation:-

If purchased at year 1:-

= 310000 * 3.3946 - 1548000 (1650000 - 102000)

= -495674

If purchased at year 2:-

= 310000*3.3946 - 1446000 (1548000 - 102000)

= -393674

If purchased at year 3:-

= 310000*3.3946 - 1344000 (1446000-102000)

= -291674

If purchased at year 4:-

= 310000*3.3946 - 1242000 (1344000-102000)

= -189674

If purchased at year 5:-

= 310000*3.3946 - 1140000 (1242000-102000)

= -87674

If purchased at year 6:-

= 310000*3.3946 - 1140000 (Because it will not reduce once it reaches 1140000 as given in the question)

= -87674

So, the machine should not be purchased.

(Note :- If we had solved the above question considering depreciation, 31000 depreciation should be reduced from the cashflow 310000)

In the question, it is not given whether we should consider depreciation or not.