Problem 7-5 Option to Wait

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $318,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,710,000. The cost of the machine will decline by $105,000 per year until it reaches $1,185,000, where it will remain.

If your required return is 13 percent, calculate the NPV today. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

If your required return is 13 percent, calculate the NPV if you wait to purchase the machine until the indicated year. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	NPV
Year 1	$
Year 2	$
Year 3	$
Year 4	$
Year 5	$
Year 6	$

Should you purchase the machine?

	Yes
	No

If so, when should you purchase it?

	Today
	One year from now
	Two years from now