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A machine is purchased for 50000 machine will contribute 12000 per year for the next 5 years. Assume borrowing cost is 10% p.a. Determine whether machine should be purchased or not?
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A machine is purchased for 50000 machine will contribute 12000 per yea...
Decision on purchase of machine
Introduction:
A company is considering the purchase of a machine which costs 50000. The machine is expected to contribute 12000 per year for the next 5 years. The company's borrowing cost is 10% p.a. The company needs to decide whether to purchase the machine or not.
Calculation of Net Present Value:
The net present value (NPV) of the machine can be calculated as follows:
NPV = (PV of future cash inflows) - (PV of initial investment)
where PV is the present value.
PV of future cash inflows:
The future cash inflows are 12000 per year for the next 5 years. The present value of these cash inflows can be calculated using the formula:
PV = FV / (1 + r)n
where FV is the future value, r is the discount rate, and n is the number of periods.
PV of future cash inflows = 12000 x ((1 - (1 + 0.10)-5) / 0.10) = 45828.80
PV of initial investment:
The initial investment is 50000.
NPV = 45828.80 - 50000 = -4171.20
Decision:
Since the NPV is negative, the company should not purchase the machine.
Reasons:
The negative NPV indicates that the present value of the future cash inflows is less than the initial investment. This means that the company will not earn enough to cover the cost of the machine and the cost of borrowing. Therefore, it is not advisable to purchase the machine.
Introduction:
A company is considering the purchase of a machine which costs 50000. The machine is expected to contribute 12000 per year for the next 5 years. The company's borrowing cost is 10% p.a. The company needs to decide whether to purchase the machine or not.
Calculation of Net Present Value:
The net present value (NPV) of the machine can be calculated as follows:
NPV = (PV of future cash inflows) - (PV of initial investment)
where PV is the present value.
PV of future cash inflows:
The future cash inflows are 12000 per year for the next 5 years. The present value of these cash inflows can be calculated using the formula:
PV = FV / (1 + r)n
where FV is the future value, r is the discount rate, and n is the number of periods.
PV of future cash inflows = 12000 x ((1 - (1 + 0.10)-5) / 0.10) = 45828.80
PV of initial investment:
The initial investment is 50000.
NPV = 45828.80 - 50000 = -4171.20
Decision:
Since the NPV is negative, the company should not purchase the machine.
Reasons:
The negative NPV indicates that the present value of the future cash inflows is less than the initial investment. This means that the company will not earn enough to cover the cost of the machine and the cost of borrowing. Therefore, it is not advisable to purchase the machine.
Community Answer
A machine is purchased for 50000 machine will contribute 12000 per yea...
ANS - should not be purchased
as
its present value is less than from value of machinery
as
its present value is less than from value of machinery
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A machine is purchased for 50000 machine will contribute 12000 per year for the next 5 years. Assume borrowing cost is 10% p.a. Determine whether machine should be purchased or not?
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A machine is purchased for 50000 machine will contribute 12000 per year for the next 5 years. Assume borrowing cost is 10% p.a. Determine whether machine should be purchased or not? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about A machine is purchased for 50000 machine will contribute 12000 per year for the next 5 years. Assume borrowing cost is 10% p.a. Determine whether machine should be purchased or not? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A machine is purchased for 50000 machine will contribute 12000 per year for the next 5 years. Assume borrowing cost is 10% p.a. Determine whether machine should be purchased or not?.
A machine is purchased for 50000 machine will contribute 12000 per year for the next 5 years. Assume borrowing cost is 10% p.a. Determine whether machine should be purchased or not? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about A machine is purchased for 50000 machine will contribute 12000 per year for the next 5 years. Assume borrowing cost is 10% p.a. Determine whether machine should be purchased or not? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A machine is purchased for 50000 machine will contribute 12000 per year for the next 5 years. Assume borrowing cost is 10% p.a. Determine whether machine should be purchased or not?.
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