An asset is purchased for $40,000. It is expected to provide an additional $10,000 of annual net cash inflows. The asset has a 10-year life and an expected salvage value of $3,300. The hurdle rate is 10%. The present value of an annuity factor of 10% for 10 years is 6.1446. The present value of $1 discounted for 10 years at 10% is 0.3855. Given the data provided, the net present value of the investment is approximately:

Question

Quizplus · Accepted Answer

Step 1: Calculate the present value of the annual net cash inflows using the annuity factor:
$10,000 x 6.1446 = $61,446

Step 2: Calculate the present value of the salvage value using the discount factor:
$3,300 x 0.3855 = $1,272.15

Step 3: Calculate the initial investment as a negative present value:
$40,000 x -1 = -$40,000

Step 4: Calculate the net present value by adding the present values and subtracting the initial investment:
$61,446 + $1,272.15 - $40,000 = $22,718.15

Therefore, the net present value of the investment is approximately $22,718, making option B the correct answer.

An Asset Is Purchased for $40,000