ABC Corporation is considering the purchase of a machine that would cost $110,000 and would last for 4 years. At the end of 4 years, the machine would have a salvage value of $16,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $30,000. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor (s) using the tables provided. The net present value of the proposed project is closest to:

Question

Business

Peyton Gallagher

21 May, 00:45

ABC Corporation is considering the purchase of a machine that would cost $110,000 and would last for 4 years. At the end of 4 years, the machine would have a salvage value of $16,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $30,000. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor (s) using the tables provided. The net present value of the proposed project is closest to:

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Norah Villa · Answer 1

-$8,705

Explanation:

The computation of the Net present value is shown below

= Present value of all yearly cash inflows after applying discount factor + salvage value - initial investment

where,

The Initial investment is $110,000

All yearly cash flows would be

= Annual cost savings * PVIFA for 4 years at 12%

= $30,000 * 3.0373

= $91,119

Refer to the PVIFA table

And, the salvage value would be

= Salvage value * pvif for 4 years at 12%

= $16,000 * 0.636

= $10,176

The discount factor should be computed by

= 1 : (1 + rate) ^ years

Now put these values to the above formula

So, the value would equal to

= $91,119 + $10,176 - $110,000

= - $8,705