Monday, July 20, 2015

Mayberry Textiles Inc. is considering the purchase of a new machine which has an initial cost of 400,000.Annualoperatingcashinflowsareexpectedtobe100,000 each year for eight years. No salvage value is expected at the end of the asset's life. Mayberry's cost of capital is 14 percent. Compute the net present value of the machine. (Ignore income taxes)

Net present value is calculated using the following formula:
NPV = X * [(1+r)^n - 1]/[r * (1+r)^n]
here,
x=amount received per period
n= number of periods
r= rate of return
Plugging in the following figures:
Initial cost: 400,000.Annualoperatingcashinflows:100,000 each year
n= 8 years
Cost of capital: 14 %
The net present value is: 100,000,000*((1+0.14)^8-1)/(0.14*(1+0.14)^8) = $626,566.42 (rounded to the nearest cent).
Since this is higher than the initial payment, the machine is worth the initial investment.

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