A company wants to buy a new machine but there are some unce

A company wants to buy a new machine, but there are some uncertainties related to the estimation of the cash flow. Following information is given. p = 0.3 p = 0.5 p = 0.2 First cost $50,000 $40,000 $30,000 Annual savings $3,000 $5,000 $4,000 Annual costs $8,000 $7,000 $5,000 Salvage value $6,000 $4,500 $5,000 The machine is expected to have a useful life of 8 years. MARRis 6%. Determine the NPW of the machine. Hint: calculate the expected value of each cash flow first.

Solution

50,000 - 3000 + 8000   * 0.3 = 16500

40,000 - 5000 + 7000 * 0.5 = 21000

30,000 - 4000 + 5000   *0.2 = 6200

16500 + 21000 + 6200 =43700