Natchez, Inc. is considering the purchase of a new machine costing $200,000. The company will incur $5,000 per year in operating expenses but it will allow the company to earn an additional $100,000 per year in revenues. Natchez expects the machine to provide future benefits for 3 years and salvage value at the end of the 3-year period to be $10,000. The company uses straight-line depreciation method. The income tax rate is 30%. If the required rate of return is 10%, how much is the net present value of this project?

Question

Quizplus · Accepted Answer

The net present value of the project is $20,143. The project has a positive net present value, which means that it is expected to generate more cash flow than it costs to implement. The project is therefore considered to be a good investment.