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How do you calculate the net present value for The Carroll Broom Company's new machine purchase?

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The Carroll Broom Company is thinking of purchasing a new automatic straw-binding machine. The company president, Joan Carroll, has determined that such a machine would save the company $10,000 per year in labor costs. The machine would cost $46,500 and would have a useful life of 10 years and a scrap value of $500. The machine would require servicing after five years at a cost of $1,000. Carroll uses a discount rate of 16%. Compute the net present value. From a quantitative standpoint, should the machine be purchased?

The company paid $50,000 cash for a capital investment. The company expects the investment to generate net cash inflows of $8,400 per year. What is the payback period of this investment?

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Solution Summary

The solution provides a present value calculation for the investment and the payback period as well.

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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