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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A new machine costs $400,000. It generates an after-tax inflow of $100,000 for 8 years with the opportunity cost being 14%. The income each year has to be discounted at a rate equal to the opportunity cost and added for all the eight years.

The net present value = net inflow-net outflow

Net outflow = $100000

Net inflow = (100,000/1.14)+(100,000/1.14^2)+(100,000/1.14^3)+(100,000/1.14^4)+(100,000/1.14^5)+(100,000/1.14^6)+(100,000/1.14^7)+(100,000/1.14^8)~$463,886

NPV = $463,886 - $400,000 = $63,886

The net present value is approximately $63,886

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