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Estimating future performance with NPV Quick Check 1. Classify cash flows as a) Setup cost (start of project) - NO DISCOUNT . Benzo Company is considering the purchase of a b) One off cost or benefit after setup (PV=C/(1+r)') machine that costs $100,000, has a useful life of 20 years, and no salvage value. The company's c) Annuity (paid every year) PVa = A/r(1 - 1/(1+r)') discount rate is 8%. The machine will increase 2. Use calculator to calculate present values (-ve annual cash inflows by $10,000 (=A). for costs, +ve for benefits) What is the NPV of getting the machine? 3. Add them together to get NPV a) $100,000 4. Rank by NPV b) $2,315 - $10OK + A x 1/r (1 - - $315 - $1,819 38 Quick Check v Quick Checkv . Benzo Company is considering the purchase of a Benzo Company is considering the purchase of a machine that costs $100,000, has a useful life of machine that costs $100,000, has a useful life of 20 years, and no salvage value. The company's 20 years, and no salvage value. The company's discount rate is 8%. The machine will increase discount rate is 8%. The machine will increase annual cash inflows by $10,000 (=A). annual cash inflows by $10,000 (=A). What is the payback period for the machine? What is the simple rate of return of the machine? a) It does not pay back (-ve NPV) a) Not applicable (-ve NPV) b) 5 years b) 2% 10 years C) 10% d) 20 years d) 5% 40 39

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