The management of Penfold Corporation is considering the purchase of a machine that would cost $440,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $102,000 per year. The company requires a minimum pretax return of 16% on all investment projects. The net present value of the proposed project is closest to (Ignore income taxes.):Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the proposed project is closest to $(28,022). The net present value is calculated by discounting the future cash flows of the project back to the present at the required rate of return. The future cash flows are the annual cost savings of $102,000. The required rate of return is 16%. The discount factor for 7 years at 16% is 4.32948. The net present value is $102,000 x 4.32948 - $440,000 = $(28,022).

The Management of Penfold Corporation Is Considering the Purchase of a Machine