The NPV of each choice is: Year Cost Value of Future Savings (at time of purchas

Question

                    The NPV of each choice is:                 

                                Year                                                              Cost                                                              Value of Future Savings
                                (at time of purchase)                                                              0                                                              $5,000                                                              $7,000                                                              1                                                              4,650                                                              7,000                                                              2                                                              4,300                                                              7,000                                                              3                                                              3,950                                                              7,000                                                              4                                                              3,600                                                              7,000                                                              5                                                              3,250                                                              7,000                              Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain's opportunity cost of capital is 11.0 percent, and the costs and values of investments made at different times in the future are as follows: Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. Suggest when should Bell Mountain buy the new accounting system?

Explanation / Answer

Hi,

Please find the answer as follows:

The machine should be purchased in Year 4

Thanks.

Year Value of Future Savings (A) Cost (B) Difference (A-B) NPV 0 7,000 5,000 2,000 2,000 1 7,000 4,650 2,350 2117 2 7,000 4,300 2,700 2191 3 7,000 3,950 3,050 2230 4 7,000 3,600 3,400 2240 5 7,000 3,250 3,750 2225

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