Albert Shoe Company is considering investing in one of two machines that attach heels to shoes.
Machine A costs $68,660 and is expected to save the company $20,130 per year for six years.
Machine B costs $95,160 and is expected to save the company $25,130 per year for six years.
Determine the net present value for each machine if the required rate of return is 13 percent.
(Ignore taxes.)
Solution
PV = cashflow/(1+i)^n
i = .13 or 13%, n = number of compoundings
NPV = present value of all cash inflows - intial investment
NPV of macine A:
Machine B:
Year Cash flows Present value at 13%
0 (68,660) (68,660)
1 20,130 17,814
2 20,130 15,765
3 20,130 13,951
4 20,130 12,346
5 20,130 10,926
6 20,130 9,669
NPV 11,811