Question
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
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 "NPV Calculation for Copy Machine Investment by Jacksons Quality Copies". Round to the nearest dollar.
C. Should the company purchase the harvesting machine? Explain.
| Net Present Value Analysis | |||||||||||||||||
| a. | The net cash inflow ignoring the time value of money is calculated as follows: | ||||||||||||||||
| Today 0 | Year 1 | Year 2 | Year 3 | Year 4 | |||||||||||||
| Purchase price | |||||||||||||||||
| Maintenance costs | Total | ||||||||||||||||
| Annual savings | Cash In | ||||||||||||||||
| Salvage value | (Out) | ||||||||||||||||
| Total cash in (out) | |||||||||||||||||
| b. | The net present value is calculated as follows: | ||||||||||||||||
| Today 0 | Year 1 | Year 2 | Year 3 | Year 4 | |||||||||||||
| Purchase price | |||||||||||||||||
| Maintenance costs | |||||||||||||||||
| Annual savings | |||||||||||||||||
| Salvage value | Net | ||||||||||||||||
| Total cash in (out) | Present | ||||||||||||||||
| PV factor (r =11%) | Value | ||||||||||||||||
| Present value | |||||||||||||||||
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Principles Of Finance With Excel
Authors: Simon Benninga
2nd Edition
0199755477, 9780199755479
