Question

•Suppose a firm is considering whether or not to buy a piece of machinery which it will use over the next four

years.

•The machine will cost £1,000 to purchase this year and will give rise to £200, £300, £300 and £400 in maintenance expenses in years 1, 2, 3 and 4 respectively.

•The machine will generate revenues of £600, £800, £800 and £800 in years 1, 2, 3 and 4 respectively.

•The scrap value of the machine will be £200 at the end of the year 4.

•The required rate of return is 10%

•Calculate the Net Present Value of this machine to the firm.

•Should the firm purchase the machine based on this NPV?

Business