Question: Net Present Value Custom Homes plans to purchase a new woodcutting machine. The old machine has a salvage value of $25,000 now and a predicted

Net Present Value

Custom Homes plans to purchase a new woodcutting machine. The old machine has a salvage value of $25,000 now and a predicted salvage value of $6,000 in six years. If the old machine is kept, it must be overhauled in one year, which will cost $40,000. The new machine costs $200,000 and has a predicted salvage value of $14,000 at the end of six years. If purchased, the new machine will allow cash savings of $40,000 for each of the first three years and cash savings of $20,000 for each year of its remaining six-year life.

What is the net present value of purchasing the new machine if the company has a hurdle rate of 11%?

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