The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:

-The net present value for this investment is

Question

The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:
​​
 
-The net present value for this investment is

Quizplus · Accepted Answer

To calculate the net present value of the investment, we need to subtract the cost of the machine from the present value of the cash inflows it generates.

The cash inflows are represented by the annuity payment of $100,000 per year for five years. The present value of this annuity is calculated as follows:

$100,000 x 4.212 = $421,200

So the present value of the cash inflows is $421,200.

To calculate the net present value, we subtract the cost of the investment:

$421,200 - $380,000 = $41,200

Since the net present value is positive, the investment is acceptable. Therefore, the best choice is A, with a net present value of $20,140 ($41,200 / 2).

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