A company is evaluating an investment in a piece of machinery.The machine costs £10,000 and is expected to generate cash flows of £3,000 in year 1,£4,300 in year 2 and £5,800 in year 3.The discount rate is 10% and the relevant discount factors are:
$$\begin{array} { c c }
\text { Year 1 } & 0.909 \
\text { Year 2 } & 0.826 \
\text { Year 3 } & 0.751
\end{array}$$
Calculate the NPV

Question

A company is evaluating an investment in a piece of machinery.The machine costs £10,000 and is expected to generate cash flows of £3,000 in year 1,£4,300 in year 2 and £5,800 in year 3.The discount rate is 10% and the relevant discount factors are:
$$\begin{array} { c c } 
\text { Year 1 } & 0.909 \
\text { Year 2 } & 0.826 \
\text { Year 3 } & 0.751
\end{array}$$
Calculate the NPV

Quizplus · Accepted Answer

The NPV is calculated by discounting the future cash flows back to their present value and subtracting the initial investment. The calculation is as follows: $$NPV = (£3,000 \times 0.909) + (£4,300 \times 0.826) + (£5,800 \times 0.751) - £10,000 = £2,727 + £3,551.80 + £4,355.80 - £10,000 = £634.60.$$

A Company Is Evaluating an Investment in a Piece of Machinery.The