Nevland Corporation is considering the purchase of a machine that would cost $130,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $44,000. The company requires a minimum pretax return of 19% 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 net present value (NPV) can be calculated using the formula: NPV = (Cash inflows/outflows * Present Value Factor) - Initial investment. Given the 19% required return, we use the present value of an annuity table for the $44,000 annual savings over 6 years and the present value of a single sum table for the $18,000 salvage value at the end of year 6. Assuming the present value factors from the tables are approximately 3.797 for the annuity and 0.355 for the single sum at 19% for 6 years, the calculation is: NPV = ($44,000 * 3.797) + ($18,000 * 0.355) - $130,000 = $167,068 + $6,390 - $130,000 = $26,458. The closest option provided is $26,376.

Nevland Corporation Is Considering the Purchase of a Machine That