Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $300,000. The annual cost savings if the new machine is acquired will be $80,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be $40,000. Upper Darby Park Department is assuming no tax consequences. If Upper Darby Park Department has a required rate of return of 10%, which of the following is closest to the present value of the project?

Question

Quizplus · Accepted Answer

To calculate the present value of the investment, we need to use the formula:

PV = -Initial cost + PV of cost savings + PV of terminal disposal value

PV of cost savings = Annual cost savings / Required rate of return = $80,000 / 0.1 = $800,000

PV of terminal disposal value = Terminal disposal value / (1 + r)^n = $40,000 / (1 + 0.1)^5 = $24,836.60

Therefore, the present value of the investment is:

PV = -$300,000 + $800,000 + $24,836.60 = $524,836.60

The closest answer choice is C, $28,120.

Upper Darby Park Department Is Considering a New Capital Investment