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3 December, 15:32

Simone Company is considering the purchase of a new machine costing $50,000. It is expected to save $9,000 cash per year for 10 years, has an estimated useful life of 10 years, and no salvage value. Management will not make any investment unless at least an 18% rate of return can be earned. Using the net present value method, determine if the proposal is acceptable. Assume all tax effects are included in these numbers.

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  1. 3 December, 15:52
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    At the rate of return of 18%, the purchase of the new machine is not convenient.

    Explanation:

    Giving the following information:

    Simone Company is considering the purchase of a new machine costing $50,000. It is expected to save $9,000 cash per year for 10 years, has an estimated useful life of 10 years, and no salvage value. Management will not make any investment unless at least an 18% rate of return can be earned.

    We need to find the net present value using the following formula:

    NPV = - Io + ∑[Cf / (1+i) ^n]

    Cf = cash flow

    NPV = - 50,000 + 9,000/1.18 + 9,000/1.18^2 + 9,000/1.18^3 + ... + 9,000/1.18^10

    NPV = - 9,553

    At the rate of return of 18%, the purchase of the new machine is not convenient. It will produce a loss in value.
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