Misty Mountain Shop is considering purchasing a new piece of equipment that would be used for 6 years. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and a salvage value of $100,000 at the end of its useful life. If the discount rate is 8%, what is the approximate net present value of purchasing this new piece of equipment?

Question

Ferguson

Business

9 October, 20:11

Misty Mountain Shop is considering purchasing a new piece of equipment that would be used for 6 years. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and a salvage value of $100,000 at the end of its useful life. If the discount rate is 8%, what is the approximate net present value of purchasing this new piece of equipment?

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Answers (1)

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Tomas Morrow · Answer 1

NPV = $ 87,592.90

Explanation:

Net present value is calculated by taking the Present Day (discounted) value of all future Net Cash Flow based on the Business Cost of Capital and subtracting the Initial cost of the Investment.

Calculation of Net present value (Financial Calculator)

Period and Cash flow

CF0 = ($900,000)

CF1 = $200,000

CF2 = $200,000

CF3 = $200,000

CF4 = $200,000

CF5 = $200,000

CF6 = $300,000

Cost of Capital = 8%

NPV = $ 87,592.90