A machine costs $25,000;it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years.The required rate of return is 12%.The net present value of the machine is:

Question

A machine costs $25,000;it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years.The required rate of return is 12%.The net present value of the machine is:

Quizplus · Accepted Answer

We can use the formula for net present value:

NPV = -Initial Cost + (Cash Inflow1/ (1+r)^1) + (Cash Inflow2/ (1+r)^2) + ... + (Cash Inflown/ (1+r)^n)

NPV = -25,000 + (8,000/1.12) + (8,000/1.12^2) + (8,000/1.12^3) + (8,000/1.12^4) + (8,000/1.12^5) - (2,000/1.12) - (2,000/1.12^2) - (2,000/1.12^3) - (2,000/1.12^4) - (2,000/1.12^5)

NPV = -$3,369.99

Since the NPV is negative, the project would not be worth investing in, and the best choice is option B.

A Machine Costs $25,000;it Is Expected to Generate Annual Cash