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Determine the NPV of replacing machine

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Question - A company currently operates a machine that generates cash flows of 35,000 a year for the next five years (machine 1). You are considering whether to replace this machine today with another more powerful machine that will produce cash flows of 50,000 a year for the same period of five years (machine 2). Both machines will be worthless at the end of the five years. Replacing machine 1 with machine 2 will require an initial investment of 40,000 today. This investment already takes into account the cost of machine 2 and today's resale value of machine 1. In addition, you paid 100,000 for machine 1 last year. Suppose the discount rate is 15%. Determine the NPV of replacing machine 1 with machine 2?

Reference no: EM133120588

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