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
Example of Quantity Discounts Consider illustration one and suppose that a quantity discount of 5 percent is given whether a minimum 200 units is ordered. Required Fin

MRP systems and Functions of MRP systems Where dependent demand exists, for example between finished product and its constituent parts, item forecasting or inventory control t

#ques1. Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20

I need to understand a practice question for exam, but I only have a partial solution. I need a more detailed solution, so can understand how to arrive at the answer. The problem

Standard ratio analysis should be used to supplement the discussion of strength and weakness. The following ratios are most often used by practitioners: (a) Growth Rates: PEG R

Characteristics of sole proprietorship The main characteristics of sole proprietorships are as follows: 1) Ownership- The ownership of the business unit is by one person.

Lease Finance Leasing is a contract between one party called lessor as owner of asset and other called lessee whereas the lessee is provided the right to utilize the asset as

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

why borrow from a country with a high interest rate instead of a country with a low interest rate

Internal finance can avoid the agency costs of debt and equity finance. In practice it is the most important source of funding.   (a)  Discuss potential problems of internal finan