Benaflek Co. purchased some equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $ (1,800). Annual cost savings were: $20,000 for year 1; $16,000 for year 2; and $12,000 for year 3. The amount of the initial investment wasYear Present Value PV of an Annuity of 1 at 12% of 1 at 12%1.893.893 2.797 1.6903.712 2.402A. $40,232. B. $37,356. C. $40,956. D. $36,632.

Question

Business

Cael Archer

28 January, 19:26

Benaflek Co. purchased some equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $ (1,800). Annual cost savings were: $20,000 for year 1; $16,000 for year 2; and $12,000 for year 3. The amount of the initial investment wasYear Present Value PV of an Annuity of 1 at 12% of 1 at 12%1.893.893 2.797 1.6903.712 2.402A. $40,232. B. $37,356. C. $40,956. D. $36,632.

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Answers (1)

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Amiya Lloyd · Answer 1

The correct option is C,$40,956

Explanation:

NPV=present value annual cost savings-initial investment

NPV is - $1800

present value of annual savings=$20,000 / (1+12%) ^1+$16,000 / (1+12%) ^2+$12,000 / (1+12%) ^3=$39,153.61

-$1800 = $39,153.61 - initial investment

initial investment=$ 39,153.61+$1800=$40953.61

The correct option is the option C,$40,956 which is closest to $40953.61, the difference arose from rounding errors when the discount factors were rounded to to three decimal places instead of using the exact figures