Mayberry Textiles Inc. is considering the purchase of a new machine which has an initial cost of $400,000. Annual operating cash inflows are expected to be $100,000 each year for eight years. No salvage value is expected at the end of the asset's life. Mayberry's cost of capital is 14 percent. Compute the net present value of the machine. (Ignore income taxes)

Expert Answers

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Net present value is calculated using the following formula:

NPV = X * [(1+r)^n - 1]/[r * (1+r)^n]

here,

x=amount received per period

n= number of periods

r= rate of return

Plugging in the following figures:

Initial cost: $400,000.

Annual operating cash inflows: $100,000 each year

n= 8 years

Cost of capital: 14 %

The net present value is: 100,000,000*((1+0.14)^8-1)/(0.14*(1+0.14)^8) = $626,566.42 (rounded to the nearest cent).

Since this is higher than the initial payment, the machine is worth the initial investment.

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