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Suppose you purchase a machine for to replace some of the manual labor in your company
- Suppose you purchase a machine for to replace some of the manual labor in your company. The machine cost $100,000 which it supposed to run for 10 years. Additionally, you need working capital of $20,000 to run this machine effectively. If machine saves $20,000 per year in labor and will sell for $10,000 when machine is obsolete at the end of the 10 year. Establishing the suggested table, fine the NPV of this purchase when machine is obsolete at the end of the 10-year period. Use 12% as the rate of return.
Expert Solution
Calculation of NPV
| Year | Particulars | Amount | PVF @ 12% | PV |
| 1 to 10 | Savings | 20000 | 5.6502 | 113004 |
| 10 | Terminal Cashflow | 30000 | 0.322 | 9660 |
| (Salvage + working capital) | ||||
| PVIF | 122664 | |||
| PVOF (Machine cost + Working capital) | 120000 | |||
| NPV (PVIF -PVOF) | 2664 |
Since NPV is positive , we should purchase machine.
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