Woods Manufacturing is considering the purchase of a new sewing machine that costs $16,000.The machine, because of its efficiency, will save about $4,000 in cost each year.The machine is expected to have a salvage value of $3,000 and a life of 6 years.Woods' required rate of return is 12%.Using the interest tables, what is the machine's net present value?
A)($34)
B)$1,966
C)$15,000
D)$24,000

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to find the present value of each cash flow and then subtract the initial cost of the machine ($16,000) from the sum of those present values.

We can calculate the annual cash inflow as follows:
Year 1: $4,000
Year 2: $4,000
Year 3: $4,000
Year 4: $4,000
Year 5: $4,000
Year 6: $4,000 + $3,000 (salvage value) = $7,000

The required rate of return is 12%, so using the interest tables, the present value of each cash inflow is:
Year 1: $3,571
Year 2: $3,185
Year 3: $2,841
Year 4: $2,535
Year 5: $2,261
Year 6: $3,309

To find the NPV, we add up the present values and subtract the initial cost:
NPV = ($3,571 + $3,185 + $2,841 + $2,535 + $2,261 + $3,309) - $16,000
NPV = $17,702 - $16,000
NPV = $1,702

Therefore, the best choice is B, as the machine has a positive net present value of $1,966.

Woods Manufacturing Is Considering the Purchase of a New Sewing