Floyd Manufacturing purchased an asset costing $50 000.Annual operating cash inflows are expected to be $11 000 each year for eight years.No salvage value is expected at the end of the asset's life.Assuming Floyd's cost of capital is 12 per cent,what is the asset's net present value? (ignore income taxes)

Question

Quizplus · Accepted Answer

To find the net present value (NPV), we need to discount the annual operating cash inflows using Floyd's cost of capital, which is 12%. We can use the NPV formula:

NPV = (-) Initial investment + PV of annual cash inflows

NPV = (-)$50,000 + $11,000(PVIFA 12%, 8)

PVIFA 12%, 8 = 5.6502

NPV = (-)$50,000 + $11,000(5.6502)

NPV = $46,444

Since the NPV is positive, the investment is expected to generate a return that exceeds Floyd's cost of capital. Therefore, the asset is a good investment.

The closest answer choice to our calculated NPV is B, $4644.

Floyd Manufacturing Purchased an Asset Costing $50 000