Robertson is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes. The net present value for this investment is
A) Cannot be determined
B) Positive
C) Zero
D) Negative

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows at the required rate of return and then subtracting the initial investment. Given the annual cost savings of $8,000 for 14 years and a 20% discount rate, the present value of these savings will be less than the initial investment of $40,000, resulting in a negative NPV.

Robertson Is Considering Automating Its Production Line at a Cost