A new asset is expected to provide service over the next four years.It will cost $500,000,generates annual cash inflows of $150,000,and requires cash operating expenses of $30,000 each year.In addition,a $10,000 overhaul will be needed in year 3.If the company requires a 10% rate of return,the net present value of this machine would be:

Question

A new asset is expected to provide service over the next four years.It will cost $500,000,generates annual cash inflows of $150,000,and requires cash operating expenses of $30,000 each year.In addition,a $10,000 overhaul will be needed in year 3.If the company requires a 10% rate of return,the net present value of this machine would be:

Quizplus · Accepted Answer

Using the net present value formula:

NPV = -Initial Investment + PV of Cash Inflows - PV of Cash Outflows

Year 0: 
-Initial Investment = $500,000

Year 1-4: 
PV of Cash Inflows = $150,000 x PVIFA(10%,4) = $479,378

PV of Cash Outflows = $30,000 x PVIFA(10%,4) = $95,876

Year 3: 
PV of Cash Outflows for overhaul = $10,000 x PVIF(10%,3) = $7,727

NPV = -$500,000 + $479,378 - $95,876 - $7,727 = -$127,110

Since the NPV is negative, the machine does not meet the company's rate-of-return requirement of 10%. Therefore, the best choice is B.

A New Asset Is Expected to Provide Service Over the Next