Anna Taylor buys a machine for her business. The machine costs $150,000. Anna estimates that the machine can produce $40,000 cash inflow per year for the next five years. Her cost of capital is 12 percent. What is the approximate net present value?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash inflows back to their present value and then subtracting the initial investment. Using the formula for NPV and a discount rate of 12%, the cash inflows of $40,000 per year for five years have a present value less than the initial investment of $150,000, resulting in a negative NPV, which is closest to option A, $(5,808).

Anna Taylor Buys a Machine for Her Business