Company A is considering the purchase of a new machine that would lower cash outflow

Economics Sep 04, 2020

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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