# Bets Company is currently considering the purchase of some new machinery. The machinery will have...

## Question:

Bets Company is currently considering the purchase of some new machinery. The machinery will have a useful lifetime of 9 years and will cost $600,000 to be paid in the current period. If it decides to purchase it, the company expects that the new machinery will generate an initial cash flow of $100,000 one year from now. The cash flow is expected to grow at the rate of 4% per year for years 2 through 4, but then to decline at the rate of 2% per year for years 5 through 9 at which time the machinery will be scrapped. (Assume that the scrap value is zero.) The appropriate discount rate for this project is 16%.

Is this project worth undertaking? Draw the timeline.

## Capital Budgeting:

Several tools can be used to determine whether proposed capital projects are viable. The best methods to use for long-term projects should consider the company's cost of capital and the time value of money.

## Answer and Explanation: 1

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We must calculate the annual cash flows (the time line) and then discount those at 16% to find the answer:

Y0 | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | Y9 | |
---|---|---|---|---|---|---|---|---|---|---|

Initial... |

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Chapter 5 / Lesson 20Learn about what net present value is, how it is calculated both for a lump sum and for a stream of income over multiple years. View some examples on NPV.

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