The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 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 of this investment: The net present value for this investment is

Question

The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 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 of this investment:​  The net present value for this investment is

Quizplus · Accepted Answer

To calculate net present value, we need to find the present value of cash inflows and outflows and deduct the initial investment. The calculation is as follows:

PV of cash inflows:
Year 1: $100,000 x 0.909 = $90,900
Year 2: $120,000 x 0.826 = $99,120
Year 3: $140,000 x 0.751 = $105,140
Year 4: $160,000 x 0.683 = $109,280
Year 5: $180,000 x 0.621 = $111,780

Total PV of cash inflows = $516,220

Initial investment = $490,000

Net present value = $516,220 - $490,000 = -$26,780

Since the net present value is negative, the investment is not acceptable. Therefore, the best choice is C.

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