Question

A company is considering whether to buy a new machine, which costs $97,000. The cash flows (adjusted for taxes and depreciation) that would be generated by the new machine are given in the following table: Year Cash flow50, 000 $40,000 $ 25, 000$20,000 (a) Find the total present value of the cash flows. Treat each year's cash flow as a lump sum at the end of the year and use an interest rate of 12.5% per year, compounded annually. Year Payment PresentValue 1 $50,000 71191.4 2 $40,000 50625 3 $25,000 28125 4 $20,000 20000 TOTAL 169941.4

Answer 1

Year	Payment	Present value
1	$ 50,000.00	$      44,444.44
2	$ 40,000.00	$      31,604.94
3	$ 25,000.00	$      17,558.30
4	$ 20,000.00	$      12,485.90
		$ 1,06,093.58

The final answer and corresponding figures may be different a little bit due to Factor table round off.

Please go through the given below method of calculating PV of cash flows to understand this.

Year	Payment (A)	Discounting factor (B)	Present value (C=A x B)
1	$      50,000.00	0.888889	$      44,444.44
2	$      40,000.00	0.790123	$      31,604.94
3	$      25,000.00	0.702332	$      17,558.30
4	$      20,000.00	0.624295	$      12,485.90
Total present value of the cash flows			$ 1,06,093.58

Replace the Discounting factor from the table given to you to get exact amount to fill.