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14 August, 08:07

The following data pertain to an investment proposal (Ignore income taxes.) : Cost of the investment$34,000 Annual cost savings $10,000 Estimated salvage value$5,000 Life of the project 5years Discount rate 11% Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor (s) using the tables provided. The net present value of the proposed investment is closest to: (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

a) $5,925

b) $2,960

c) $2,965

d) $19,000

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  1. 14 August, 10:54
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    NPV = $5,926.226

    Explanation:

    The Net present value (NPV) is the difference between the Present value (PV) of cash inflows and the PV of cash outflows. A positive NPV implies a good and profitable investment project and a negative figure implies the opposite.

    NPV = PV of cash inflows - PV of cash outflows

    PV of annual savings = A * (1 - (1+r) ^ (-n)) / r

    r - discount rate - 11%, n - number of years - 5, A - annual savings

    = 10,000 * (1 - 1.11) ^ (-5)) / 0.11 = 36,958.97

    PV of scrap value = F * (1+r) ^ (-n)

    r - discount rate - 11%, n - number of years - 5, F - salvage value - 5,000

    5,000 * (1.11) ^ (-5) = 2,967.256

    NPV = 36,958.97018 + 2,967.256 - 34,000

    = 5,926.226

    NPV = $5,926.226
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