Sparky Company is considering the replacement of an old machine with the purchase of a new piece...


Sparky Company is considering the replacement of an old machine with the purchase of a new piece of production equipment that will reduce labor and maintenance costs by $45,000 per year.

If Sparky purchases the new machine, the company will sell the old equipment for an estimated $20,000 salvage value.

Data related to the new machine follows:

Initial Investment $300,000
Useful Life 10 years
Salvage value (new machine) $30,000
Hurdle Rate 12%

Assume all cash flows occur at the end of the year and ignore income taxes.

Calculate the net present value of the investment in the new machine. (Round your answer to the nearest whole dollar. If you have a negative NPV,record your answer using () parenthesis. EXAMPLE: If your NPV is ($2,000), enter your answer as (2000).

Present Value of $1

Periods 10% 12% 14%
5 .621 .567 .519
8 .467 .404 .351
10 .386 .322 .270

Present Value of Ordinary Annuity

Periods 10% 12% 14%
5 3.791 3.605 3.433
8 5.335 4.968 4.639
10 6.145 5.650 5.216

Net Present Value Method:

The net present value method is capital budgeting technique used for evaluating a given investment decision. It yields a net value which would be added to shareholders' wealth if a given project is undertaken. If the net present value is positive, the project is accepted and if it is otherwise, the project is rejected.

Answer and Explanation: 1

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The net investment for replacing the old machine with a new one is given by:

  • = Initial investment in the new machine - salvage value received if the...

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How to Calculate Net Present Value: Definition, Formula & Analysis


Chapter 5 / Lesson 20

Learn 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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