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Capital Budgeting

This topic has 3 replies, 2 voices, and was last updated 9 years ago by neilsolaris.

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September 28, 2015 at 7:27 pm #274028
mumbaikar
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Please help me solve this question.
A company uses 10% as cost of capital.
Calculate the NPV of purchasing the machine based on the following:
*purchase price of $600000
* annual running costs of $45000 for next 5 years paid annually in arrears
* a residual value of $220000 at end of 5 years
September 29, 2015 at 1:13 pm #274108
mumbaikar
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- Topics: 50
- Replies: 45
please help me answer this question!
October 23, 2015 at 8:17 pm #278625
neilsolaris
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Cost of the machine =60,000
Running costs = 45,000 * 6.1051 = 274,729.5
Less residual value = 22,000 / 1.1^5 = 13,660.269
Total = £321,069.231
I used an annuity table for the running costs, and if a course my answer could be wrong.
October 23, 2015 at 10:43 pm #278636
neilsolaris
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- Topics: 59
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The running costs pv is wrong in my working, I was using a dodgy annuity table! It should be
45,000 * 3.79079 = 170,585.55
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