BUSN732 | Global Business Management | Net Present Value Calculation

1. The decision regarding which Twilight Acre Farm is worried about is concerned upon the performance of the machines that is existing and whether to replace that machine with a new one (Kashyap, 2017). Moreover, it is been seen that if Twynstra wants to increase its productivity it have to ensure that the machines can perform better. The existing machine is forced to work for 440 hours yearly whereas if new machine is being brought then the productivity will raise by 15 % and the as compared to the existing machine and yearly 380 hours is needed to invest in order to manufacture the agricultural commodities. Apart from that the labors are paid hourly 20$ and due to reduction in the cost the total labor cost will also get decreased and consequently the cost to company will also decrease. So basically the decision challenge that is being faced by Twynstra is regarding the ability of understand which will be the best alternative decision to undertake regarding selling the machine or buying the new one. Net present value of the future earnings is the best decision making criteria on this respect to indemnify the best possible and feasible solution (Baio et al., 2017).

2. Considering the cost of capital to be 15 %, the calculated level of inflows and outflows can be computed and based on that the NPV of the new machine can be calculated as follows:

			Total Cash Outflow				Approx. Sensitivity
			161625.3				($14,315.61)
years (n)	Cash Inflows(FV)	PV at COC=FV/((1+k)^n)	PV at 15	Cumulative discounted Cash Inflows	Cost of Capital (k)	k%	1+k
1	42000	36521.74	36521.73913	36521.74	0.15	15%	1.15
2	42000	31758.03	31758.03403	229905.1	0.15	15%	1.15
3	42000	27615.68	27615.68176	257520.8
4	140000	80045.45	80045.45438	337566.2			NPV of New Machine	Remarks
				337566.2	175940.9093	161625.3	14315.6093	Accepted
	266000	175940.9	175940.9093	513507.1	175940.9093	161625.3	14315.6093
				513507.1			Profitability Index	1.08857282

 

This the NPV of the new machine is 14315.6093 units and the profitability index is 1.08. This shows that it’s better to choose the new machine and sell out the old machine.

3. The pros of new machinery is that

• It will enhance the productivity of the farms by 15 %
• The machine hours will get reduced from 440 hours to 380 hours yearly
• Thus the cost of fuel will reduce annually
• The labor cost will reduce
• The profitability will rise

The cons of new machinery is that

• It will bear an initial endowment of 115000 if the existing machine is exchange with the seller with its existing trade value of 152000
• The investment will bear a interest rate of 5.9 % which will bear an extra amount of cost over the principal taken as loan
• The outflow of cash is high at the initial stage

4. As an owner the decision will be invest there where the future earnings are greater and hence the choice of decision will be to go for buying the new machine and selling out the old one since the new machine has a positive NPV. The major justification lies in the future valuation of the present cash flows. It is been seen that the initial investments are high in case of the new machine. However, the old machine needs repairing cost and bearing that cost will incur an enormous amount. Moreover, the productivity will not rise nor the working hours of the machine will get reduce (Baio et al., 2017). The new machine will raise the productivity by 15 % band reduce thee working hours of the machine by 40 hours yearly. Moreover, the initial outflow will be compensated by the future cash inflows which is a crucial point of interest. In case of the new machine the investment is high but the future earnings as per estimated through the NPV calculation is found to be positive. As it is being found that per hour earning for the farm will be $ 35 and yearly returns will be $ 42000 units. While in case of the old machine the annual productivity is $ 35700. The trade value of the new machine after 4 years will be $140000. The old machine is facing repairing issues and after four years its performance will deteriorate even more while possessing a trade value of 75000 dollars. Moreover, the profitability index is found to be more than 1 and hence the justified solution will be to by the new machine and sell the existing machine.

References

Baio, F. H., Silva, S. P. D., Camolese, H. D. S., & Neves, D. C. (2017). FINANCIAL ANALYSIS OF THE INVESTMENT IN PRECISION AGRICULTURE TECHNIQUES ON COTTON CROP. Engenharia Agrícola, 37(4), 838-847. https://www.scielo.br/scielo.php?pid=S0100-69162017000400838&script=sci_arttext

Kashyap, R. (2017). Fighting Uncertainty with Uncertainty: Time Value of Knowledge and the Net Present Value (NPV) of Knowledge Machines. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3038567