Question

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year Income from Operations Net Cash Flow 1 $18,750 $93,750 2 18,750 93,750 3 18,750 93,750 4 18,750 93,750 5 18,750 93,750 The net present value for this investment is a. $19,875 b. $118,145 c. $(19,875) d. $(118,145)

Answer 1

Answer:

The correct answer is a. $19,875

Explanation:

Net Present Value : The net present value is that value which shows a difference between present value of all cash inflows and initial investment.

Since in the given question, the initial investment is given and the present value should be computed which is shown below

= Net cash flow of year 1 × present value factor for 5 years

= $93,750 × 4.212

= $394875

Now, the net present value = present value of all cash inflows - initial investment.

= $394875 - $375,000

= $19875

Since, the net present value comes positive, the investment should be accepted as it generates higher returns.

Hence, the correct answer is a. $19,875