How do I compute NPV, without the income tax considered, for a new machine with a cost of $400,000? The annual operating cash inflow is $100,000 for 8 years. There is no salvage value. The cost of capital is 14%.  

The net present value is $63886.4.

Expert Answers

An illustration of the letter 'A' in a speech bubbles

The initial investment is of $400,000 for buying a new machine. This machine has a life of 8 years and no salvage value. The cost of capital is 14 percent.

If the present value of cash inflows is PVCi and the present value of cash outflows is PVCo, the net present value NPV is given by:

NPV = PVCi - PVCo.

The amount invested in the machine is $400,000. The cash inflow over the next 8 years is $100,000. The present value of the cash inflow in year t is given by (Cash flows)/( 1+r)^t with interest rate 14%.

PVCi = 100000*(1/1.14+1/1.14^2+...1/1.14^8)

= 100000*4.63886

= 463886.4

NPV = 463886.4 - 400000

Therefore, the net present value is $63886.4

Last Updated by eNotes Editorial on January 4, 2021
Soaring plane image

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial