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“the machine can be bought at $750000 using a bank loan charging interest at an annual rate of 7% .At the end of the year machine would have scrap value of 10% the purchase cost. If machine would be bought,maintenance cost of $20000 would be paid annually.
While Calculating the NPV three factors,purchase costs, maintenance costs and the scrap value have been discounted to the present value.
The question has clearly indicated about the 7% annual interest loan,which has not been included in calculating NPV.
What is the reason for not including interest paid and discounting back to PV ?The whole purpose of discounting is to account for the interest!!!!
We never ever include interest in the cash flows, because it would then be accounting for it twice.
I do suggest that you watch my free lectures – they are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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