# Raindrip Corp. can purchase a new machine for $1,875,000 that will provide an annual net cash... ## Question: Raindrip Corp. can purchase a new machine for$1,875,000 that will provide an annual net cash flow of $650,000 per year for five years. The machine will be sold for$120,000 after taxes at the end of year five.

What is the net present value of the machine if the required rate of return is 13.5%?

## NPV

Net Present Value is a capital budgeting technique used for evaluating projects. It is difference between initial outlay and present value of cash flow.Discount factors are used to determine present value of cash flow.

## Answer and Explanation:

{eq}NPV= -Initial Outlay+\displaystyle\frac{FV}{(1+R)^1}+\displaystyle\frac{FV}{(1+R)^2}+\displaystyle\frac{FV}{(1+R)^3}+\displaystyle\frac{FV}{(1+R)^4}+\displaystyle\frac{FV}{(1+R)^5} {/eq}

Where,

R= 0.135

FV for year 1-4 = $650,000 FV for year 5 =$650,000+$120,000 =$770,000

Initial Outlay = $1,875,000 {eq}NPV= -1,875,000+\displaystyle\frac{650,000}{(1+0.135)^1}+\displaystyle\frac{650,000}{(1+0.135)^2}+\displaystyle\frac{650,000}{(1+0.135)^3}+\displaystyle\frac{650,000}{(1+0.135)^4}+\displaystyle\frac{770,000}{(1+0.135)^5} {/eq} =$447,291.91

Thus, NPV is \$447,291.91

#### Learn more about this topic:

Cost of Capital: Flotation Cost, NPV & Internal Equity

from Corporate Finance: Help & Review

Chapter 3 / Lesson 18
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