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Sir do not understand how to calculate the NPV of the question. Can u pls help me.
Calculate the NPV of purchasing the machine based upon the following:
-Purchase price of $600,000
-Annual running costs of $45000 for the next five years, paid annually in arrears.
– A residual value of 220,000 at the end of the five years.You have not written the rate of interest (cost of capital).
There are three steps:
a) The PV of the outflow of 600,000 is 600,000
b) The PV of the running costs is 45,000 x the annuity factor at whatever the interest rate is for 5 years.
c) The PV of the residual value is 220,000 x the ordinary discount factor for 5 years at whatever the interest rate is
The overall PV is (a) + (b) – (c)
The free lectures on discounting will help you.
Have you actually watched the free lectures? If you have, then you should not need me to solve it. (Also you presumable have an answer in the same book in which you found the question!).
a) the PV is 600,000
b) the PV is 45,000 x 3.791 = 170,595
c) the PV is 220,000 x 0.621 = 136,620Therefore the NPV is (a) + (b) – (c)
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