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8 July, 20:19

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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  1. 9 July, 00:19
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    -$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
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