Zinc Corp is planning to purchase new machinery. The initial cash outlay is expected to be $40,000 and the expected return on investment is 9%. The cash flows for the next 3 years are $9,800, $11,720 and $9,640. Based on net present value (NPV) analysis, Zinc Corp should:
A) accept the project as the NPV is $14,500.
B) reject the project as the NPV is $(13,700.84).
C) accept the project as the NPV is (28,900.25).
D) reject the project as the NPV is 40,500.
E) accept the project as the NPV is $56.225.

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount the cash flows at the required rate of return (9%). Using the formula for NPV, the calculation is as follows:

NPV = -40,000 + 9,800/(1+0.09)^1 + 11,720/(1+0.09)^2 + 9,640/(1+0.09)^3

NPV = -$13,700.84

Since the NPV is negative, the project should be rejected.

Zinc Corp Is Planning to Purchase New Machinery