Net present value method - example, Finance Basics

Net Present Value Method - Example

Jeremy limited wishes to expand its output by purchasing a new machine worth 170,000 and installation costs are estimated at 40,000/=.  In the 4th year, this machine will call for an overhaul to cost 80,000/=.  Its expected inflows are:

                                                Shs.

                   Year 1                  60,000

                   Year 2                  72,650

                   Year 3                  35,720

                   Year 4                  48,510

                   Year 5                  91,630

                   Year 6                  83,715

This company can raise finance to purchase machine at 12% interest rate.

Compute NPV and advise management accordingly.

Solution

                                                                Shs.

Cost of machine at present value             170,000

Installation cost                                          40,000

                                                                 210,000

 

Overhaul cost in the 4th year =          80,000

Discounting factor =                           (1.12)4

Consequently present value        = 80,000/(1.12)4

                                                     = Shs.50, 841.446

Sum present value of investment = 260,841.45

PV inflows   = 60,000 / (1.12) + 72,650 / (1.12)2 + 35,720 / (1.12)3 +48,510 / (1.12)4 +91,630 / (1.12)5 +83,715 / (1.12)6

Consequently:

NPV = 262,147.28 - 260,841.45

NPV   = 1,305.83

The NPV is positive and I would inform the management to invest.

Posted Date: 1/31/2013 12:48:57 AM | Location : United States







Related Discussions:- Net present value method - example, Assignment Help, Ask Question on Net present value method - example, Get Answer, Expert's Help, Net present value method - example Discussions

Write discussion on Net present value method - example
Your posts are moderated
Related Questions
term paper about financial markets in pakistan

AsStudents will analyze and synthesize the financial reports of an organization of their choice and present their findings in a PowerPoint presentation (with completed Notes sectio

A City has determined that building a new water distribution system using a new source of water would have an annual costs of $5,750,000 and annual net benefits of $4,250,000. The

International Data Systems information on revenue and costs is only relevant up to a sales volume of 100,000 units. After 100,000 units, the market becomes saturated and the price


Competitors and General Public - Measuring Business Performance Competitors These are interested in the company's presentation from the market share point of view and wi

Role of CMA - Share Prices Role of CMA in determination of share prices 1. The CMA does not in any type of way influence share price of quoted companies. 2. The prices o

Investment  Attributes/  Factors  Influencing  Selection  of  Investment In  choosing specific  investments,  investors  would require definite  ideas  regarding  features

Debtors Collection Period - Formula Fomula is given below: Debtors collection period = 365/ Debtors turnover Or (365 x Average debtors)/ Annual credit sales This

discuss the meaning and advantage of captive insurance