Homework SourseA company is considering adding a new piece of equipment tha
A company is considering adding a new piece of equipment that will speed up their processes. The cost of the piece of equipment is $42000. It is expected that the new piece of equipment will lead to cash flows of $17000, $29000, and $40000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Please take your time and explain each calculation....thanks.
Solution
Net Present Value [NPV] = Present Value of cash Inflows – Present Value of Outflows
Year
Annual Cash Inflows
(a)
Present Value factor at 12% Formula
Present Value factor at 12%
(b)
Present Value of Annual Cash inflows
1
$17,000
1/ (1+0.12)1
0.8928571
$15,178.57
2
$29,000
1 / (1+0.12)2
0.7971939
$23,118.62
3
$40,000
1 / (1+0.12)3
0.7117802
$28,471.21
$66,768.40
Net Present Value [NPV] = Present Value of cash Inflows – Present Value of Outflows
= $66,768.40 – 42,000
= $24,768.40
“ Therefore, Net Present value [NPV] of the Investment = $24,768.40 “
| Year | Annual Cash Inflows (a) | Present Value factor at 12% Formula | Present Value factor at 12% (b) | Present Value of Annual Cash inflows
|
| 1 | $17,000 | 1/ (1+0.12)1 | 0.8928571 | $15,178.57 |
| 2 | $29,000 | 1 / (1+0.12)2 | 0.7971939 | $23,118.62 |
| 3 | $40,000 | 1 / (1+0.12)3 | 0.7117802 | $28,471.21 |
| $66,768.40 |
