Figure 8.2

Net Present Value Analysis. Heston Farming Company would like to purchase a harvesting machine for $100,000. The machine is expected to have a life of 4 years, and a salvage value of $20,000. Annual maintenance costs will total $28,000. Annual savings are predicted to be $60,000. The companys required rate of return is 11 percent.

Required:

1. Ignoring the time value of money, calculate the net cash inflow or outflow resulting from this investment opportunity.

2. Find the net present value of this investment using the format presented in Figure 8.2. Round to the nearest dollar.

3. Should the company purchase the harvesting machine? Explain.

Figure 8.2 NPV Calculation for Copy Machine Investment by Jackson's Quality Copies The NPV is $1,250. Because NPV is > 0, accept the investment. (The investment provides a return greater than 10 percent.) Today Year Year Year 1 Timeline (n) Year 2 Year 3 Year 5 Year 7 Purchase price $(50,000) Maintenance cost $ (1,000) Labor savings 11,000 Salvage value Total cash in (out) ${50,000) $10,000 PV factor (r = 10%) x 1.0000 x 0.9091 Present value $(50,000+ $ 9,091 + $ (1,000) $ (1,000) 5 (1,000) $ (1,000) $ (1,000) S (1,000) 11,000 11,000 11.000 11,000 11,000 11,000 5,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 15,000 x 0.8264 X 0.7513 X 0.6830 x 0.6209 x0.5645 x 0.5132 $ 8,264 + $ 7,513 + $ 6,830 + $ 6,209 + $ 5,645 + $ 7,698 = $ 1,250