Net Present Worth 2 Your boss is wanting to invest in a new

Net Present Worth #2: Your boss is wanting to invest in a new machine that will improve both quality and safety. How much can she afford to pay for this machine if it will increase revenue and reduce costs by $50,000 per year for a 5 year period? The machine can be salvaged for 5% of purchase price at the end of 5 years. Use an interest rate of 10%.

Solution

the benefits from the machine for the next 5 years at 10% discount rate is

= 50,000*3.791= $189,550.

when the machine is depreciated at 5% for 5 years then the total cost can become as

189,550*1.05= $199,027

he can invest aproximately $199,027 or any mount lesser than this. if the machine cost is more than this, do not go with it.