Santo Automotive is considering producing a new automobile product, No Text, which disengages the ability to text while driving.Marketing data indicate that the company will be able to sell 39,000 units per year at $16 each.The product will be produced in a section of an existing factory that is currently not in use.To produce No Text, Santo must buy a machine that costs $820,000.The machine has an expected life of five years and will have an ending residual value of $50,000.Santo expects to generate net income of $56,000 per year.The income tax rate is 30% and the company's required rate of return is 10%.How much is the net present value?

Question

Quizplus · Accepted Answer

The correct answer is B. The net present value is $7,113. The net present value is calculated by taking the present value of the future cash flows and subtracting the initial investment. The present value of the future cash flows is calculated by multiplying the annual net income by the present value factor for the appropriate number of years and discount rate. The present value factor is calculated using the formula PV = 1 / (1 + r)^n, where r is the discount rate and n is the number of years. In this case, the present value factor for five years and a discount rate of 10% is 3.7908. The present value of the future cash flows is therefore $56,000 x 3.7908 = $212,484.80. The initial investment is $820,000. Therefore, the net present value is $212,484.80 - $820,000 = $7,113.

Santo Automotive Is Considering Producing a New Automobile Product, No