Net Present Value?

Question

Which machine should be purchased?
Update: Machine A Machine B Machine C
Original cost $150,000 $186,000 $198,000
Estimated life 5 years 6 years 6 years
Salvage value -0- 9,000 18,000
Estimated annual cash inflows$45,000 $60,000 $85,000
Estimated annual cash outflows$15,000 $20,000 $44,000
Calculate the Net Present Value of each machine. Assume an 8% discount rate.
Machine A $
Machine B $
Machine C $
Which machine should be purchased?

Answer 1

First find the annual net cash flow for each machine:

Machine A: $45,000 - $15,000 = $30,000

Machine B: $60,000 - $20,000 = $40,000

Machine C: $85,000 - $44,000 = $41,000

Now discount those annual cash flows at 8% and subtract the original cost. For Machines B and C, also include the present value of the salvage value at the end.

Machine A

PV of cash flows = $30,000 × 3.99271 = $119,781

NPV = $119,781 - $150,000

NPV = -$30,219

Machine B

PV of cash flows = $40,000 × 4.62288 = $184,915

PV of salvage value = $9,000 × 0.63017 = $5,671

NPV = $184,915 + $5,671 - $186,000

NPV = $4,587

Machine C

PV of cash flows = $41,000 × 4.62288 = $189,535

PV of salvage value = $18,000 × 0.63017 = $11,343

NPV = $189,535 + $11,343 - $198,000

NPV = $2,878 (approximately)

Machine B should be purchased because it has the highest NPV.