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    Installing a New Machine

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    Sunshine Allday Company is investigating the viability of installing a new machine to expand their operations. The machine under consideration will require an initial outlay of $215,000. If purchased, the new machine will generate before-tax net cash inflows of $55,000 per annum. The term of the project is eight years. At the end of the eight years, the machine is expected to have a salvage value of $40,000. The company has a required rate of return of 15 percent. Assume the company is fully integrated with the imputation tax system so investments will be evaluated on a pre-tax basis.

    You are required to:
    1. Calculate the net present value of the machine.
    2. Calculate the profitability index of the machine.
    3. Calculate the internal rate of return of the machine.
    4. Calculate the payback period of the machine.

    Year Year Year Year Year Year
    0 1 2 3 4 5
    Purchase Price ($215,000)
    Inflow $55,000 $55,000 $55,000 $55,000 $55,000
    Sale Price $40,000
    Net Cash Flow ($215,000) $55,000 $55,000 $55,000 $55,000 $95,000
    1.15 1.3225 1.520875 1.74900625 2.011357188
    PV Cash Flow ($215,000) $47,826 $41,588 $36,163 $31,446 $47,232

    Required Rate Of Return 15.00%
    NPV -10,744
    IRR 13%
    PI 0.950026046.

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    https://brainmass.com/business/capital-budgeting/installing-machine-402260

    Solution Preview

    ANSWER
    1. Calculate the net present value of the machine
    cost of the project 215000
    cash inflows 55000

    years 15%
    1 55000 0.87 47850
    2 55000 0.756 41580
    3 55000 0.658 36190
    4 55000 0.572 31460
    5 55000 0.497 27335
    6 55000 0.432 23760
    7 55000 0.376 20680
    8 95000 0.327 31065
    present value ...

    Solution Summary

    The solution discusses installing a new machine. The net present value of the machines and profitability index of the machines are calculated.

    $2.19

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