Net Present Value Calculation for Rearden Metal's Blast Furnace Purchase

What is the Net Present Value of paying for the blast furnace now for Rearden Metal?

Given the price of the blast furnace, the discount offered, and the interest rate, what is the closest NPV for paying now?

Answer:

The NPV of paying for the blast furnace now is $950,000.

Net Present Value (NPV) is a crucial financial metric used in investment decision-making to evaluate the potential profitability of a project or investment. In the case of Rearden Metal's decision to purchase a new blast furnace, the NPV calculation helps determine whether paying for the furnace now or waiting until it is installed is the better financial choice.

When analyzing the scenario, we consider the $1,000,000 price of the blast furnace, the $50,000 discount offered by the manufacturer for paying now, and the 7% interest rate. The NPV is calculated by comparing the present value of cash flows associated with each decision.

By taking the $50,000 discount and calculating its future value in one year with the 7% interest rate, we find that the discount is worth $53,500. The present value of this future discount is $50,000. When subtracting this discount from the furnace's cost, we arrive at an NPV of $950,000 for paying for the furnace now.

Therefore, based on the NPV analysis, it is financially advantageous for Rearden Metal to pay for the blast furnace now and benefit from the $50,000 discount, resulting in a net gain of $950,000 when considering the time value of money.