Answer to Question #52023 in Microeconomics for asif

Question

Zenith manufacturing is considering the purchase of a new machine that would have to be paid for in annual payments of Rs.5000 at the end of the each of the next four years. Having this machine would increase the firms profit by Rs.4500 per year for the next 15 years. These profits are also received at the end of each year. If the interest rate is 10%, should Zenith buy the machine?

Answer 1

Annual payments of Rs.5000 for 4 years, increase in the firms profit by Rs.4500 per year for the next 15 years, i = 10%.
In this case the Net present value of the project will be:
NPV = (4500 - 5000)/1.1 - 500/1.1^2 - 500/1.1^3 - 500/1.1^4 + 4500/1.1^5 + 4500/1.1^6 + 4500/1.1^7 + 4500/1.1^8 + 4500/1.1^9 + 4500/1.1^10 + 4500/1.1^11 + 4500/1.1^12 + 4500/1.1^13 + 4500/1.1^14 + 4500/1.1^15 = 17,257.45
So, Zenith should buy the machine.