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Thread: Net Present Value Method

  1. #1
    Jun 2008

    Net Present Value Method

    My problem is as follow:

    Vorteck Inc. manufactures snowsuits. Vorteck is considering purchasing a new sewing machine at a cost of $2.5 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Vorteck spent $55,000 to keep it operational. The existing sewing machine can be sold today for $260,000. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7: Year 1 $390,000 2 400,000 3 411,000 4 426,000 5 434,000 6 435,000 7 436,000 The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $380,000. This new equipment would require maintenance costs of $95,000 at the end of the fifth year. The cost of capital is 9%. Instructions Calculate the net present value. (If net present value is negative enter with either a (-) sign preceding the number or (parenthesis) around the number. Round computations and final answer for present value to 0 decimal places, e.g. 125. Round computations for Discount Factor to 5 decimal places.) $ Should Vorteck purchase the new machine to replace the existing machine?

    I thought I had this all figured out but I don't. I was going to use
    and add the cash flow amount on the top and use (1 +0.09)^0 for T =0 and so on for the following years in order to get the present value for each year. However, as I continued into this problem I got more and more lost. Please help me as I don't understand this assignment.
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  2. #2
    Jan 2009
    Punjab, Pakistan
    1.8 Million plus 55K is sunk cost thus we do not include this in our calculations

    Initial Costs

    Cost of Machinery = $-2,500,000
    Training Costs = $-85,000
    Proceeds from sale of Old Machine = $260,000

    Initial Cash Flow CF0 = $-2,325,000

    Interim Cash Flows

    $390,000 $400,000 $411,000 $426,000 $434,000 $435,000

    Teminal Cash Flow = $436,000 + $380,000 = $816,000

    Free Net Cash Flows are

    -2325000 390000 400000 411000 426000 434000 435000 816000

    Your Cost of Capital is 9%

    NPV = $-23,547

    The answer was arrived at using this online NPV Calculator

    Yet if you need to show calculations, try this online NPV Calculation tool instead
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