Fossa Road Paving Corporation is considering an investment in a curb-forming machine. The machine will cost $240,000, will last 10 years, and will have a $40,000 salvage value at the end of 10 years. The machine is expected to generate net cash inflows of $60,000 per year in each of the 10 years. Fossa's discount rate is 18%. The net present value of the proposed investment 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 net present value (NPV) of the investment can be calculated as follows:

NPV = Present value of cash inflows - Present value of initial investment

Using Exhibit 14B-1, the discount factor for 10 years at 18% is 0.20611.

The present value of the cash inflows for each year can be calculated as:

PV of cash inflows = Cash inflow for the year x Discount factor

Year 1: $60,000 x 0.20611 = $12,366.60 
Year 2: $60,000 x 0.20611 = $12,366.60 
Year 3: $60,000 x 0.20611 = $12,366.60 
Year 4: $60,000 x 0.20611 = $12,366.60 
Year 5: $60,000 x 0.20611 = $12,366.60 
Year 6: $60,000 x 0.20611 = $12,366.60 
Year 7: $60,000 x 0.20611 = $12,366.60 
Year 8: $60,000 x 0.20611 = $12,366.60 
Year 9: $60,000 x 0.20611 = $12,366.60 
Year 10: $60,000 x 0.20611 = $12,366.60

Using Exhibit 14B-2, the present value of $1 for 10 years at 18% is 0.20611.

The present value of the initial investment can be calculated as:

PV of initial investment = -$240,000 x 0.20611 = -$49,466.40

Therefore, the NPV of the investment is:

NPV = $12,366.60 x 10 - $49,466.40 + $40,000

NPV = $37,280

The NPV of the investment is positive, which means that the investment is expected to generate a return higher than the discount rate. Therefore, Fossa Road Paving Corporation should invest in the curb-forming machine.

Fossa Road Paving Corporation Is Considering an Investment in a Curb-Forming