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
Factors of Capital Structure 1. Availability of securities - This influences the company's employ of debt finance that means such if a company has enough securities, so then

Valuation of Business A business may be valued for different type of reasons that as for merger, acquisition, or takeover or liquidation or outright sale.  During purchasing a

Potential Investors - Measuring Business Performance Potential investors These parties are interested in a company in total both on long and short term basis in particula

if u were the professor wht your opinion about vincent mind stage

Define the term Placement - Methods of Floating New Issues Under this method, issue houses or brokers purchase the securities outright with the intention of placing them wi

if you won the publisher''s clearing house $10 million prize (payable as 30 pmts of $250,000 and $2.5m in yr. 30) and could invest the money at 8%, would you accept an offer of $3.

Capital Market Authority (CMA) Was established in 1990 with an Act of Parliament to assist, in creation of a conducive environment, for growth and development of capital marke

Use the concepts of marginal cost and marginal revenue to derive an optimal capital budget for Company X, which has identified 7 possible investment projects and determined its cos

Percentage of Sales Method A) Express the various balance sheet items varying along with sales as percentage of sales as assume for year 2002 stock and net fixed assets amoun

How often does the "on the run" tsy change?