The management of California Corporation is considering the purchase of a new machine costing $400,000. 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 present value index for this investment is

Question

The management of California Corporation is considering the purchase of a new machine costing $400,000. 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 present value index for this investment is

Quizplus · Accepted Answer

The present value index is calculated by dividing the present value of cash inflows by the initial investment. The present value of cash inflows can be calculated using the present value factors and the expected cash inflows of $100,000 per year for 5 years.

PV of cash inflows = $100,000 x (0.909 + 0.826 + 0.751 + 0.683 + 0.621) = $3,790,900

Present value index = $3,790,900 / $400,000 = 9.48 / 1

Therefore, the present value index is 1.14, which is greater than 1. This indicates that the investment is acceptable, as the present value of cash inflows is greater than the initial investment.

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