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NPV and Payback Period of a Bottling Machine

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Pure Water, Inc. is considering buying a new bottling machine that costs $45,000. They expect to finance 100% of the machine through a bank loan that offers them a 10% interest. The cash flows of the project are:

Year 1: $15000
Year 2: $20000
Year 3: $25000
Year 4: $10000
Year 5: $5000

1. What is the net present value of the project?
2. Based on the present value, should the project be accepted and why or why not?
3. What is the project payback period?

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Solution Summary

The solution explains how to calculate the NPV and the payback period and accept/reject the project

Solution Preview

1. NPV = PV of cash flows - initial investment
The discounting rate is given as 10%
PV of cash flows = 15,000/1.1 + 20,000/1.1^2 + 25,000/1.1^3 ...

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