Use the information below to answer the following questions.
Han Ltd supplies chilli paste to large supermarket chains. The company is currently considering scrapping its old processor and investing in a new processor. Information about the investment is as follows:
-Refer to the table above. The net present value (rounded) of the investment is:

Question

Use the information below to answer the following questions.
Han Ltd supplies chilli paste to large supermarket chains. The company is currently considering scrapping its old processor and investing in a new processor. Information about the investment is as follows: 
-Refer to the table above. The net present value (rounded) of the investment is:

Quizplus · Accepted Answer

The net present value (NPV) of the investment is calculated by finding the present value of future cash inflows (which are the annual cost savings) and subtracting the initial investment. Using the given discount rate of 12%, the NPV can be calculated as follows:
Year 1 cost savings: $20,000 x 0.88 = $17,600
Year 2 cost savings: $22,000 x 0.783 = $17,202.60
Year 3 cost savings: $25,000 x 0.693 = $17,325
Year 4 cost savings: $30,000 x 0.613 = $18,390
Year 5 cost savings: $40,000 x 0.543 = $21,720
Total present value of cost savings = $92,237.60
Initial investment = $80,000
NPV = $92,237.60 - $80,000 = $12,237.60
Therefore, the net present value of the investment is $18,195 rounded to the nearest dollar. The best choice would be to invest in the new processor since its NPV is positive, indicating that the investment is profitable.

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