discount factor for the decimal

• DaV<3333

  18 Aug 13, 00:15

  Any idea how to get the discount factor for the decimal? In red-highlighted. thanks.

   

   

  Marsh Limited is considering investing in a new machine.  The machine would cost $500,000.  It would have a life time of five (5) years and a Zero / Nil (0) residual value.  The company used the straight-line method of depreciation.

   

  It is expected that the machine will earn the following extra profit for the company during its expected life:

  Years                Profits ($)

  1                       120,000

  2                       180,000

  3                       200,000

  4                       250,000

  5                       300,000

   

  The above profits also represent the extra new cash flow expected to be generated by the machine (i.e. they exclude the machine’s initial cost and the annual depreciation charges).  The company’s cost of capital is 18%.

  Required:

  (a)           Calculate

  i)            The machine’s payback period; &                                             

  ii)           Its net present value.                                                                  

  (b)            Advise the management as to whether the new machine should be purchased. 

   

  Answer:

   

  Year / Cashflow / Cumulative cashflow / Discount Factor 

  0. (500,000) / (500,000) / 1.0000 (500,000)

  1. 120,000 / 380,000 / 0.8475 101,695

  2. 180,000 / (200,000) / 0.7182 129,273

  3. 200,000 / - / 0.6086 121,726

  4. 250,000 / 250,000 / 0.5158 128,947

  5. 300,000 / 550,000 / 0.4371 131,133

   

  Payback is 3 years 

   

• Seowlah

  18 Aug 13, 14:38

  Don't be lazy, the derivation of the discount factor can easily be found in all basic

  business finance textbooks.