You have the chance to buy a used widgetmaking machine for 2

You have the chance to buy a used widget-making machine for $200. You estimate that it will last for two more years, after which it will be worthless, but that it will bring in $150 revenue during each of those two years. If the interest rate is 8% per year, should you buy it?

Solution

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=150/1.08+150/1.08^2

=150[1/1.08+1/1.08^2]

=$150*1.783264746

=$267.49

NPV=Present value of inflows-Present value of outflows

=$267.49-$200

=$67.49(Approx).

Hence since NPV is positive;machine should be bought.