Paragas, Incorporated, is considering the purchase of a machine that would cost $370,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $4,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 19% on all investment projects. (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.The net present value of the proposed project is closest to:
A) $9,584
B) $78,530
C) $22,532
D) $19,528

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount all the cash inflows and outflows at the required rate of return or the minimum pretax return of 19%.

Calculation of NPV:
Initial investment: -$370,000
Annual cash inflows: $96,000
Salvage value: $52,000
Working capital: -$4,000
Discount factor for 8 years at 19% from Exhibit 14B-1: 0.23120

NPV = (96,000 x 0.23120) - 370,000 - 4,000 + (52,000 x 0.23120)
NPV = $19,528

Therefore, the net present value of the proposed project is closest to $19,528. Option D is the correct choice.

Paragas, Incorporated, Is Considering the Purchase of a Machine That