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16 April, 00:38

The management of Idaho 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 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing 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. Negative $126,800

b. Negative $99,600

c. positive $16,400

d. positive $25,200

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Answers (1)
  1. 16 April, 02:55
    0
    d. positive $25,200

    Explanation:

    The computation of the Net present value is shown below

    = Present value of all yearly cash inflows after applying discount factor - initial investment

    The discount factor should be computed by

    = 1 : (1 + rate) ^ years

    where,

    rate is 10%

    Year = 0,1,2,3,4 and so on

    Discount Factor:

    Year 1 = 0.909

    Year 2 = 0.826

    Year 3 = 0.751

    Year 4 = 0.683

    Year 5 = 0.621

    So, the calculation of a Present value of all yearly cash inflows are shown below

    = Year 1 cash inflow * Present Factor of Year 1 + Year 2 cash inflow * Present Factor of Year 2 + Year 3 cash inflow * Present Factor of Year 3 + Year 4 cash inflow * Present Factor of Year 4 + Year 5 cash inflow * Present Factor of Year 5

    = $180,000 * 0.909 + $120,000 * 0.826 + $100,000 * 0.751 + $90,000 * 0.683 + $90,000 * 0.621

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

    = $455,200

    So, the Net present value equals to

    = $455,200 - $430,000

    = $25,200
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