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27 February, 09:40

XYZ Corporation is considering the purchase of a machine that would cost $320,000, would last for 5 years, and would have no salvage value. The machine would reduce labor and other costs by $75,000 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:

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  1. 27 February, 10:08
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    XYZ corporation has Net present value of - 49641.78

    Explanation:

    In order to get the net present value for XYZ corporation it is important is draw the timeline for cash flows.

    0 - $320000

    1 $75000

    2 $75000

    3 $75000

    4 $75000

    5 $75000

    then using PVIF table value at 12% we will get the discounted value of cash flows.

    Year Cash Flow Discount factor

    0 - $320000 1.000

    1 $75000 0.893

    2 $75000 0.797

    3 $75000 0.712

    4 $75000 0.636

    5 $75000 0.567

    After getting the discount factor @ 12% from the PVIF table we will multiply the cash flow the with relevant discount factor to get discounted cash flows.

    Year Cash Flow Discount factor Discounted cash Flows

    0 - $320000 1.000 - $320000

    1 $75000 0.893 $66964

    2 $75000 0.797 $59790

    3 $75000 0.712 $53384

    4 $75000 0.636 $47664

    5 $75000 0.567 $42557

    at the end adding discounted cash flows will give us Net present value of $-49641
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