The CEO of Alma intends to purchase a new piece of equipment
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The CEO of Alma intends to purchase a new piece of equipment

Task 5: Net Present Value Calculation

The CEO of Alma intends to purchase a new piece of equipment to produce electronic toys for export. The initial investment is JDR 650,000, and he believes he can sell the used equipment at the end of year 5 for JDR 50,000. Alma uses a discount rate of 7%. The expected cash flows from selling the electronic toys are as follows:

Predicted Cash Inflow

Y1: JDR     250,000

Y2: JDR     265,000

Y3: JDR     175,000

Y4: JDR     160,000

Y5: JDR     100,000

Calculate the NPV for the new production line and explain why you would decide for or against the production of these toys.

Hint
Accounts and Finance"NPV or net present value is used in capital budgeting to analyze the profitability of a project or investment and is calculated by taking the difference between the present value of cash inflows and present value of cash outflows over a period of time i.e. it determine the current value of all future cash flows generated by a project, including the initial capital investment. ...
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