Bing and Associates Inc., which uses net present value to analyze investments, requires an 8% minimum rate of return. One of their entry level associates recently calculated a $200,000 machine's net present value to be $34,560, excluding the impact of straight-line depreciation. If Bing and Associates ignores income taxes and the machine is expected to have a four-year service life, the correct net present value of the machine would be:

Question

Quizplus · Accepted Answer

Since straight-line depreciation is ignored, the initial investment of $200,000 is also the salvage value at the end of the 4-year life. Therefore, the total cash flows over the four-year period would be $34,560 x 4 + $200,000 = $348,640. Using an 8% discount rate, the net present value of these cash flows would be: 
$348,640/(1.08)^1 + $348,640/(1.08)^2 + $348,640/(1.08)^3 + $348,640/(1.08)^4 - $200,000 = $34,560. Therefore, the correct net present value of the machine is $34,560, which is the same as the associate's initial calculation.