Ask Question
Today, 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.

+2
Answers (1)
  1. Today, 11:40
    0
    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
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “The management of Arnold Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers