Hello,
If you want to determine whether the investment exceeds the required return of 12%, I think we have to compare the FV of cash inflow, within the FV of the investment @ 12%. It means to compare these two parts (for machine 1):
Undiscounted cash flow: 42,200 x 1.12^3 + 42,200 x 1.12^2 + 42,200 x 1.12 + 58,200 = $217,687.64
FV of the investment: 124,000 x 1.12^4 (12% annually in 4 years) = $195,116.40
This showed that even machine 1 is qualified.
Did you spot any flaw in my thinking? I appreciate your feedback.
Thanks,
Kyle
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Kien Nguyen
Unemployed
Ottawa ON
Canada
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Original Message:
Sent: 06-03-2021 04:54 AM
From: Mohammed Nadeem
Subject: calculation of NPV
From this we can come to a conclusion that Machine 1 is having the least Payback period and Better NPV at the end of 4Th Year.
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Mohammed Nadeem
Accountant
Vi Sigma Apparel Group FZE
Abu Dhabi
United Arab Emirates
Original Message:
Sent: 06-02-2021 07:47 AM
From: Nanditha James
Subject: calculation of NPV
Hi all,
Can you explain step by step how to calculate the NPV for both the investments options given below.
Nittany Co. is considering purchasing one of the two different machines for their factory. Both machines would be used to introduce a new product to Nittany's already diversified product line. There is, however, great disagreement among management as to which of the projects should be invested in by Nittany. There are only enough funds for one of the following projects to be invested in. You have been hired as a consultant to assist management in making a decision as to which of these two machines should be purchased.
Information about the 2 machines is below:
| Machine 1 | Machine 2 |
Initial Cost | $100,000 | $200,000 |
Transportation & Installation | $ 20,000 | $40,000
|
Estimated Salvage Value | $10,000 | $90,000
|
Expected Useful Life | 5 years | 8 years
|
Tax Depreciation Method | Straight-Line* | Straight Line*
|
Estimated increased revenues each period | $30,000 | $52,000
|
Estimated Cost Savings each period | $20,000 | $ 6,000
|
Investment in Working Capital at the beginning of the project & $4,000 at the end of the year 4
| $16,000 | $8,000 |
* In the calculation of tax depreciation expense, the salvage value of the machine is not taken into account and the entire initial cost of the asset will be depreciated over the useful life of the asset.
The cost of capital for Nittany is 10% and Nittany generally does not invest in any project that does not return at least 12%. Nittany's tax rate is 30%.
Thank you