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

The operating and cost data of ABC Ltd. are: Sales Rs. 20,00,000 Vari

In 1998, the Syndicated Bank Loan market (defined as loans having more than two bank lenders) was a vast and cheap source of debt financing for U.S. corporations.  This market was

evaluate the importance of leverage in financial management of a small scale company

Investment Analysis Any type of company will invest finance for the sake of deriving a return that is useful for four main purposes as: 1. To reward the owners or shareholder


Type of Partnerships There are two main kinds of partnerships. Namely: Ordinary Partnership - An ordinary partnership is one in which all members have unlimited liability.

The Mountain Fresh Company had earnings per share (EPS) of $6.32 in 2006 and $11.48 in 2011. The company pays out 30 percent of its earnings as dividends per share (DPS), and the

Shareholders Expectation and Growth Stage Growth Stage Dividend policy is likely to be influenced with firm's growth stage as like a young rapidly growing firm is probabl

Problem 1 a) Explain Trade Liberalisation and give your views whether emerging economies should adopt trade liberalization protectionist measures to attain economic growth.