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2 November, 11:02

The management of Arnold Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for one through five years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to this information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 20,000 100,000 4 10,000 90,000 5 10,000 90,000 The net present value for this investment is a. positive $152,000. b. positive $25,200. c. negative $124,800. d. negative $25,200.

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  1. 2 November, 11:40
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    The Net present value is $25,200

    Thus, the correct option is b. positive $25,200

    Explanation:

    Net Present Value : The net present value shows the difference between the initial investment and total present value of all year cash inflows after applying the discount rate.

    In mathematically,

    Net Present Value = Total present value of all year cash inflows after applying the discount rate - Initial investment

    So,

    The initial investment is $430,000

    And the yearly cash inflows is equals to

    Year 1 = $180,000 * 0.909 = $163,620

    Year 2 = $120,000 * 0.826 = $99,120

    Year 3 = $100,000 * 0.751 = $75,100

    Year 4 = $90,000 * 0.683 = $61,470

    Year 5 = $90,000 * 0.621 = $55,890

    Now, compute the sum of all yearly cash inflows which is equals to

    = $163,620 + $99,120 + $75,100 + $61,470 + $55,890

    = $455,200

    So, the Net present value = $455,200 - $430,000 = $25,200

    Hence, the Net present value is $25,200

    Thus, the correct option is b. positive $25,200
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