Mezzita Inc. is considering purchasing equipment costing $12000 with a 6-year useful life. The equipment will provide cost savings of $3100 and will be depreciated straight-line over its useful life with no salvage value. Mezzita requires a 10% rate of return. $\quad $ $\quad $ $\quad $ $\quad $ $\quad $$\text { Present Value of an Annuity of } 1$
$\begin{array}{lllllll}
\text { Period }&8\%&9\%&10\%&11\%&12\%&15\%\
6 & 4.623 & 4.486 & 4.355 & 4.231 & 4.111 & 3.784
\end{array}$ What is the approximate net present value of this investment?

Question

Mezzita Inc. is considering purchasing equipment costing $12000 with a 6-year useful life. The equipment will provide cost savings of $3100 and will be depreciated straight-line over its useful life with no salvage value. Mezzita requires a 10% rate of return.  $\quad $ $\quad $ $\quad $ $\quad $ $\quad $$\text { Present Value of an Annuity of } 1$
$\begin{array}{lllllll}
\text { Period }&8\%&9\%&10\%&11\%&12\%&15\%\
6 & 4.623 & 4.486 & 4.355 & 4.231 & 4.111 & 3.784
\end{array}$ What is the approximate net present value of this investment?

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to find the present value (PV) of all cash inflows and outflows at the required rate of return. In this case, the initial outflow is $12,000 and the annual cash inflow is $3,100. Using the formula for PV of an annuity, we get:

PV of cash inflows = $3,100 x (1 - 1/1.1^6)/0.1 = $14,902.86
PV of initial outflow = $12,000

NPV = PV of cash inflows - PV of initial outflow
= $14,902.86 - $12,000
= $2,902.86

Therefore, the approximate net present value of this investment is $1501.

Mezzita Inc \quad \quad \quad \quad \quad

Mezzita Inc $\quad$ $\quad$ $\quad$ $\quad$ $\quad$