Question

(Ignore income taxes in this problem.) Allen Company's required rate of return is 14%. The company is considering the purchase of a new machine that will save $10,000 per year in cash operating costs. The machine will cost $40,000 and will have an 8-year useful life with zero salvage value.

Required:

i) Discuss the implications for project investment priority based on your answer in (i) and (ii).

Answer 1

We present the solution in EXCEL:

Initial investment 40,000. Annual cash flow 10,000.

We will discount the cash flow in each year at a rate of 14%.

Next, we add up the amount of discounted flows for 8 years with the initial investments and get a positive NPV.

NPV>0, so this project has a place to be.