The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: The net present value for this investment is

Question

The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment:  The net present value for this investment is

Quizplus · Accepted Answer

To calculate the net present value, we need to find the present value of the cash inflows and subtract the initial cost. The annual cash inflows are not given, so we cannot find them, but we are given the present value factors for each year. We can use these factors to find the present value of an annuity of $1 for five years at 10%. Using a financial calculator or formula, we get the present value to be $3.791. Therefore, the present value of the cash inflows is $3.791 x $130,000 = $492,730. Subtracting the initial cost of $490,000, we get a net present value of $(16,170). This investment would result in a loss of $16,170, so it is not acceptable.

The Management of Arkansas Corporation Is Considering the Purchase of a New