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: A) Ignoring the time value of money, calculate the net cash inflow or outflow resulting from this investment opportunity. B)Find the net present value of this investment using the format presented in Figure 8.2. Round to the nearest dollar. C)Should the company purchase the harvesting machine? Explain.

Figure 8.2 NPV Calculation for Copy Machine Investment by Jackson's Quality Copies The NPVis $1,250. Because NPVis > o, accept the investment. (The investment provides a return greater than 1o percent.) Today 0 Year Year Year Year 4 Year Year Year Timeline (n) Purchase price Maintenance cost Labor savings Salvage value Total cash in (out) $(50,000) 10,000 10,00010,000 pV factor (r = 10%) 1.0000 0.9091-0.8264|0.7513 Present value $ (50,000) (1,000) (1,000) (1,000) 11,000 (1,000)(1,000) 11,000 (1,000) $ (1,000) 11,000 5,000 15,000 0.5132 11,000 11,000 11,000 11,000 10,000 10,000 10,000 0.6830 0.6209 0.5645 $(50,000)+$ 9,091 + $ 8,264+$ 7,513+ $ 6,830+$ 6,209 + S 5,645+S 7,698 = $ 1,250 EXERCISES 35. Net Present Value Analysis a. The net cash inflow ignoring the time value of money is calculated as follows Today 0 _Year 1 _Year2 Year 3__ _Year 4_ Purchase price Maintenance costs Annual savings Salvage value Total cash in (out) Total Cash In (Out) $48,000 b. The net present value is calculated as follows Today 0Year Year 2 Year 3 Year 4 Purchase price Maintenance costs Annual savings Salvage value Total cash in (out) x PV factor (r =11%) Present value ($28,000) 60,000 $32,000 0.8116 $25,971 Net Present Value Figure 8.2 NPV Calculation for Copy Machine Investment by Jackson's Quality Copies The NPVis $1,250. Because NPVis > o, accept the investment. (The investment provides a return greater than 1o percent.) Today 0 Year Year Year Year 4 Year Year Year Timeline (n) Purchase price Maintenance cost Labor savings Salvage value Total cash in (out) $(50,000) 10,000 10,00010,000 pV factor (r = 10%) 1.0000 0.9091-0.8264|0.7513 Present value $ (50,000) (1,000) (1,000) (1,000) 11,000 (1,000)(1,000) 11,000 (1,000) $ (1,000) 11,000 5,000 15,000 0.5132 11,000 11,000 11,000 11,000 10,000 10,000 10,000 0.6830 0.6209 0.5645 $(50,000)+$ 9,091 + $ 8,264+$ 7,513+ $ 6,830+$ 6,209 + S 5,645+S 7,698 = $ 1,250 EXERCISES 35. Net Present Value Analysis a. The net cash inflow ignoring the time value of money is calculated as follows Today 0 _Year 1 _Year2 Year 3__ _Year 4_ Purchase price Maintenance costs Annual savings Salvage value Total cash in (out) Total Cash In (Out) $48,000 b. The net present value is calculated as follows Today 0Year Year 2 Year 3 Year 4 Purchase price Maintenance costs Annual savings Salvage value Total cash in (out) x PV factor (r =11%) Present value ($28,000) 60,000 $32,000 0.8116 $25,971 Net Present Value