Calculate the Net Present Value of Machine A
How do we calculate the Net Present Value of Machine A?
Let's find out how to calculate the Net Present Value of Machine A!
Calculation of Net Present Value (NPV) for Machine A
The Net Present Value of Machine A is R157,945.86.
To calculate the Net Present Value (NPV) of Machine A, we need to discount the expected cash flows to their present value and subtract the initial cost. The formula for NPV is as follows:
NPV = (Cash Flow Year 1 / (1 + r)^1) + (Cash Flow Year 2 / (1 + r)^2) + ... + (Cash Flow Year n / (1 + r)^n) - Initial Cost
Where r is the required rate of return and n is the number of years.
Using the given data:
Cash Flow Year 1 = 40,000
Cash Flow Year 2 = 30,000
Cash Flow Year 3 = 60,000
Cash Flow Year 4 = 70,000
Cash Flow Year 5 = 20,000
Initial Cost = 400,000
Required Rate of Return = 12%
Number of Years = 5
Calculating the present value of each cash flow using the formula (Cash Flow / (1 + r)^n):
Present Value Year 1 = 40,000 / (1 + 0.12)^1 = 35,714.29
Present Value Year 2 = 30,000 / (1 + 0.12)^2 = 23,809.52
Present Value Year 3 = 60,000 / (1 + 0.12)^3 = 42,484.59
Present Value Year 4 = 70,000 / (1 + 0.12)^4 = 43,721.51
Present Value Year 5 = 20,000 / (1 + 0.12)^5 = 11,214.95
Summing up the present values and subtracting the initial cost:
NPV = 35,714.29 + 23,809.52 + 42,484.59 + 43,721.51 + 11,214.95 - 400,000 = 157,945.86
Now you know how to calculate the Net Present Value of Machine A! Party on! 🎉