Net Present Value (2 pts): Your company needs to purchase a new compressor to support increasing compressed air demands. The new compressor will cost $225,000 and has an expected life of five years. It will save the company $25,000/yr in energy costs over the old compressor and reduce maintenance costs by $6,000/yr. Capital cost occurs at year 0, and savings will occur from year 1 to year 5. At the end of its useful life, the compressor is expected to have a salvage value of $30,000 (year 6). Calculate the net present value of this investment and answer the questions below. Show your work!

Net Present Value =

R, annual cash flow (1 + discount rate, r)t

- Year 0

Discount rate, r = 5%

t = year that cash flow occurs

Questions:

Is this new compressor a good investment? Why or why not?

If the life of the compressor was increased to a more realistic life of 10 years, do you think it would be a good investment? (you dont necessarily have to calculate all the way out to answer this)