Example of npv method, Finance Basics

Example of NPV Method

Resolution limited intends to purchase a machine worth Shs.1, 500,000 that will have a residue value Shs.200,000 after 5 years helpful life. The saving in cost resulting from the utilize of this machine are as:

                                                Shs.

                   Year 1                  800,000

                   Year 2                  350,000

                   Year 3                       -

                   Year 4                  680,000

                   Year 5                  775,000

By using NPV method, inform the company where this machine should be purchased whether the cut off rate is 14 percent and acceptable saving in cost is 12 percent of the cost of the investment.

Solution

Year

1

2

3

4

5

Saving

Scrap value

Total amount

800,000

          -

800,000

350,000

          -

350,000

-

       -

-

680,000

          -

680,000

775,000

200,000

975,000

NPV = 800,000 / (1.14) + 350,000 / (1.14)2 + 680,000 / (1.14)4 +975,000 / (1.14)5 - 1,500,000

= 1,880,067.1 - 1,500,000

= 380,067.07

Return        = (380,067.0/1,500,000) * 100         

                   = 25.337% > 12% therefore invest.

NB: By assuming that the salvage will be realized.

Posted Date: 1/31/2013 12:52:23 AM | Location : United States







Related Discussions:- Example of npv method, Assignment Help, Ask Question on Example of npv method, Get Answer, Expert's Help, Example of npv method Discussions

Write discussion on Example of npv method
Your posts are moderated
Related Questions
what is bank draft?How it can be prepared?

Solve the following Linear Programming Problem using Simple method. Maximize Z= 3x1 + 2X2 Subject to the constraints: X1+ X2 = 4 X1 - X2 = 2 X1, X2 = 0

• Company X has $100,000 face value of outstanding bonds consisting of 100 $1,000 face value bonds with a 4% annual coupon and 20 years remaining until maturity. The bonds are cur

Internal Rate of Return, I am looking for assignment help on the topic Internal Rate of Return. It would be great if anyone help me.

Managerial Finance Functions Require skilful execution, control and planning of financial activities.  Hence there are four significant managerial finance functions. Such are

advances from foreigners

Trial and Error Method a) Select any rate of interest on random and employ it to compute NPV of cash inflows. b) If rate selected produces NPV lower than the cost, want a l

according to given specialization take down an industry and investigate its managerial hierarchy to describe each of one of the managerial work level functioning

Bird-in-hand Theory Advanced via John Leitner in year 1962 and furthered with Myron Gordon in year 1963. Argues such shareholders are risk averse and prefer specific. Dividend

Terms used in Capital Market Authority 1. ACCOUNTS fourteen (14) days durations into that the stock exchange trading calendar is divided. 2. ACCOUNTS DAY - Sixth or sev