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    amyporter's Avatar
    amyporter Posts: 5, Reputation: 1
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    #1

    Jul 21, 2010, 05:00 PM
    Question Help in Accounting!
    You have the opportunity to invest in a machine that will increase cash flows by $1,600 per year. The initial investment is $5,000. The machine is expected to have a useful life of three years and have a salvage vale of $1,000. Your desired rate of return is 16%. Calculate the NPV of the investment. Show Calculations.
    amyporter's Avatar
    amyporter Posts: 5, Reputation: 1
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    #2

    Jul 22, 2010, 07:43 AM

    I believe that the answer to my question above is as follows:

    1600 X 2.245890 = 3,593.42
    4,000.00
    (406.58)
    Just need a little reassurance on both
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #3

    Jul 22, 2010, 11:30 AM
    How 'bout a bit of partial reassurance, for now? You're on the mark with the PV of the 1,600 x 3, at 3,593.42.

    However, the salvage value of the asset won't be realized until the end of the third year, not immediately. So you can't reduce the initial outlay (5K) by the full salvage value amount.

    Instead, the NPV of the whole project, at 16%, will be the sum of three amounts...

    The PV of the 3 cash flows of 1,600 (3,593.42, just as you've calc'd)
    The PV of the initial investment (neg. 5,000 as you know)
    The PV of the salvage value

    Since the salvage value CF occurs at the end of year 3, it'll be



    ... or if you're using a table using PV / FV factors, it'll be 1,000 x 0.640658.

    See whatcha get.
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