|
Example
Traders, Inc. is considering the acquisition of a new machine. After all the factors are considered (including initial costs, tax savings from depreciation, revenue from additional sales, and taxes on additional revenues), Traders projects the following cash flows from the machine:
Cash Flow After Purchase |
Year 1 |
($10,000) |
Year 2 |
$ 3,000 |
Year 3 |
$ 3,500 |
Year 4 |
$ 3,500 |
Year 5 |
$ 3,000 |
Assume that Traders' cost of capital is 9 percent, using the net present value table shows whether the new machine would at least cover its financial costs:
Net Present Value After Purchase |
Year |
Cash Flow Multiplied by |
Table Factor Equals |
Present Value |
1 |
($10,000) x |
1.000000 = |
($10,000.00) |
2 |
$ 3,000 x |
0.917431 = |
$2,752.29 |
3 |
$ 3,500 x |
0.841680 = |
$2,945.88 |
4 |
$ 3,500 x |
0.772183 = |
$2,702.64 |
5 |
$ 3,000 x |
0.708425 = |
$2,125.28 |
Net Present Value = $526.09 |
Since the net present value of the cash flow is positive, the purchase of the new machine would be at least slightly profitable for Traders.
|