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Company A is considering the purchase of a new machine that would lower cash outflow
Company A is considering the purchase of a new machine that would lower cash outflow. The cost of the machine is 30,000. The annual reduction in cash flows is:
Year Amount
1 5000
2 8000
3 12000
4 14000
If the cost of capital is 10%, calculate the following:
- the net present value of benefits (pvb)
- the net present value of costs (pvc)
- the net present value (npv)
- based on these analysis, should company A buy the machine?
Expert Solution
1. The net present value of benefits (pvb) = 5000/(1+10%)^1+8000/(1+10%)^2+12000/(1+10%)^3+14000/(1+10%)^4
=29734.99
2. The net present value of costs (pvc) =30000
3. NPV = -30000+29734.99 = -265.01
Since NPV is negative, the company should not buy the machine.
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