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Forecaster Industries is considering the purchase of a new machine that will cost the company $65,750. The machine is estimated to have a 5 year life and no salvage value. The machine is expected to generate $23,000 of cash inflows each year over the life of the asset. Forecaster's cost of capital is 12%.
-Ignoring income taxes,Forecaster should:

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Forecaster Industries is considering the purchase of a new machine that will cost the company $65,750. The machine is estimated to have a 5 year life and no salvage value. The machine is expected to generate $23,000 of cash inflows each year over the life of the asset. Forecaster's cost of capital is 12%.
-Ignoring income taxes,Forecaster should:

Quizplus · Accepted Answer

To determine the net-present-value (NPV) of a capital budgeting decision, we calculate the present value of the expected cash inflows and subtract the present value of the initial investment (outflow). In this case, the initial investment is $65,750, and we expect to receive $23,000 per year for 5 years. Using a financial calculator or Excel, we can calculate the NPV as follows:
NPV = (23,000/1.12) + (23,000/1.12^2) + (23,000/1.12^3) + (23,000/1.12^4) + (23,000/1.12^5) - 65,750
= $8,241.93
Since the NPV is positive, Forecaster Industries should purchase the machine.

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