The management of Retz Corporation is considering the purchase of a new machine costing $500,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively.In addition to the foregoing information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c }
\text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \
\hline 1 & \$ 100,000 & \$ 200,000 \
2 & 80,000 & 170,000 \
3 & 50,000 & 130,000 \
4 & 10,000 & 80,000 \
5 & 10,000 & 80,000
\end{array}$$ ? The present value index for this investment is:

Question

The management of Retz Corporation is considering the purchase of a new machine costing $500,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively.In addition to the foregoing information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } 
\text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \
\hline 1 & \$ 100,000 & \$ 200,000 \
2 & 80,000 & 170,000 \
3 & 50,000 & 130,000 \
4 & 10,000 & 80,000 \
5 & 10,000 & 80,000
\end{array}$$ ? The present value index for this investment is:

Quizplus · Accepted Answer

The present value index is calculated by dividing the total present value of future cash flows by the initial investment. Using the given present value factors and net cash flows for each year, the calculation is as follows: $$ (200,000 \times 0.909) + (170,000 \times 0.826) + (130,000 \times 0.751) + (80,000 \times 0.683) + (80,000 \times 0.621) = 181,800 + 140,420 + 97,630 + 54,640 + 49,680 = 524,170 $$ The initial investment is $500,000, so the present value index is $$ \frac{524,170}{500,000} = 1.04834 $$ which rounds to 1.05.

The Management of Retz Corporation Is Considering the Purchase of a New