Question

The management of Penfold Corporation is considering the purchase of a machine that would cost $310,000, would last for 5 years, and would have no salvage value. The machine would reduce labor and other costs by $74,000 per year. The company requires a minimum pretax return of 12% on all investment projects.The net present value of the proposed project is closest to (Ignore income taxes.):__________

Answer 1

Answer:

NPV = $-43246.56103 rounded off to - $43246.56

Explanation:

The Net Present Value or NPV is a tool used to evaluate projects. It is used with various other tools to decide whether to undertake a project or not. To calculate the Net Present Value or NPV, we take the present value of the cash inflows provided by the project and deduct the initial cost of the project.

NPV = CF1 / (1+r)  +  CF2 / (1+r)^2  +  ...  + CFn / (1+r)^n  -  Initial Cost

Where,

• CF1, CF2, ... represents cash flow in Year 1, Year 2 and so on.

• r is the required rate of return

NPV = 74000 (1+0.12)  +  74000 (1+0.12)^2  +  74000 (1+0.12)^3  +  74000 (1+0.12)^4  +  74000 (1+0.12)^5  -  310000

NPV = $-43246.56103 rounded off to - $43246.56