The president of Nash Company is considering a proposal by the factory manager for the purchase of a machine for $72,500. The useful life would be eight years, with no residual scrap value. The use of the machine will produce a positive annual cash flow of $14,000 a year for eight years. An annuity table shows that the present value of $1 received annually for eight years and discounted at 10% is 5.335. The net present value of the proposal, discounted at 10%, is:

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by multiplying the annual cash flow by the present value annuity factor and then subtracting the initial investment. NPV = ($14,000 * 5.335) - $72,500 = $74,690 - $72,500 = $2,190 positive.

The President of Nash Company Is Considering a Proposal by the Factory