southcoastboy
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How do you work out the NPV (net present value) with the following information?
- the initial cost of machinery
- annual labour cost savings
- scrap prices after 5th year
- cost of capital being 8%

I'm having a lot of trouble with this as I've not been able to attend my online lectures as I've got to care for my Mum and grandparents atm any help would greatly be appreciated though!
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ajj2000
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Are you expected to calculate based on monthly or annual cashflows?
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southcoastboy
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(Original post by ajj2000)
Are you expected to calculate based on monthly or annual cashflows?
Annual
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ajj2000
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ok - lets assume that all cashflows occur at the end of the year. If the question is not clear on this you need to state it in the answer.

Thus we have:

- the initial cost of machinery - lets say £1,000
- annual labour cost savings - lets say £400 per annum (I'm assuming any inflation is accounted for in the cost of capital figure of 8%)
- scrap prices after 5th year - lets guess £200
- cost of capital being 8%


So to work out the cashflows we work out which year they occur in. The initial cost will be in year = 0 - ie the start of the project. At year 1, 2, 3, 4 , and 5 there are savings of £400. At year 5 you get the scrap value of £200.

So:

year - 0 cashflow = (£1,000)
year -1 cashflow = 400
year -2 cashflow = 400
year -3 cashflow = 400
year -4 cashflow = 400
year -5 cashflow = 400 +200

Do you know how to apply the cost of capital?
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