Jiayao is evaluating a new machine costing 6000 today The ma

Jiayao is evaluating a new machine costing $6,000 today. The machine should save the company $3,400 (cash inflow) annually for each of the next two years. As a result of a $1400 overhaul of the machine (cash outflow) at the end of the 2nd year, a savings of $4200 (cash inflow) will be realized in year 3. All cash flows are after tax. What is the NPV of this machine if the firm’s cost of capital is 11 percent? Also, please show how to entering number in financial calculator HP 10bII+

Solution

The relevant cash flows are as below:

Year 0 (current) : - $6000 (minus denotes outflow)

Year 1 : $3400 (annual savings)

Year 2 : $3400 - $ 1400 (overhaul outflow adjusted) = $ 2000

Year 3 : $ 4200

Discount rate : 11%

NPV = -6000 + 3400/(1+11%) + 2000/(1+11%)² + 4200/(1+11%)³ = $1757.31

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