Inglewood Inc.would like to purchase a specialized production machine for $3,500,000.The machine is expected to have a life of three years,and a salvage value of $200,000.Annual maintenance costs will total $200,000.Annual material savings are predicted to be $900,000.The company's required rate of return is 20 percent.
Ignoring the time value of money,what is the net cash inflow or (outflow)resulting from this investment opportunity?

Question

Quizplus · Accepted Answer

Ignoring the time value of money, we can simply add up the cash inflows and outflows over the three years.

Cash Inflows: 
Annual material savings = $900,000 x 3 = $2,700,000
Salvage value = $200,000

Total cash inflows = $2,900,000

Cash Outflows:
Initial machine purchase = $3,500,000
Annual maintenance costs = $200,000 x 3 = $600,000

Total cash outflows = $4,100,000

Net cash outflow = Total cash inflows - Total cash outflows = $2,900,000 - $4,100,000 = -$1,200,000

The negative sign indicates a net cash outflow or investment of $1,200,000.