A manufacturing company plans to purchase a new machine costing ᐹ5,00,000. The expected cash inflows from the project are:
| Year | Cash Inflow (ᐹ) |
|---|---|
| 1 | 1,50,000 |
| 2 | 1,80,000 |
| 3 | 2,00,000 |
| 4 | 1,60,000 |
The required rate of return (discount rate) is 10%.
The Net Present Value is calculated using:
NPV=ᖑt=14CFt(1+0.10)tᖒ500000NPV=\sum_{t=1}^{4}\frac{CF_t}{(1+0.10)^t}-500000
Questions
- Calculate the Net Present Value of the project.
- Should the company accept the investment? Give reasons.
- Explain the importance of NPV in capital budgeting decisions.