You are considering investing $600,000 in a new automated inventory system that will provide after-tax cost savings of $50,000 next year.These cost savings are expected to grow at the same rate as sales.If sales are expected to grow at 5% per year and your cost of capital is 10%,then what is the NPV of the automated inventory system?
A)$400,000
B)$500,000
C)-$100,000
D)$1,000,000

Question

Quizplus · Accepted Answer

The NPV of the automated inventory system is $400,000. This is calculated by taking the present value of the after-tax cost savings over the life of the project and subtracting the initial investment. The after-tax cost savings are expected to grow at the same rate as sales, which is 5%. The cost of capital is 10%.

You Are Considering Investing $600,000 in a New Automated Inventory