Use the following information to answer the next two questions. The Slick Hotel is appraising the merit of a proposed investment in a vending machine with an eight year life. The investment will require an initial outlay of $22,988 and provide increased cash inflows of $24,000 per annum and generate increased cash outflows of $20,000 per annum. There will be no salvage value at the end of the life of the investment.
-Assuming a 6% cost of capital, what is the net present value of the Slick Hotel vending machine investment?

Question

Quizplus · Accepted Answer

To calculate net present value (NPV), we need to discount the cash inflows and outflows to present value using the 6% cost of capital. We can then subtract the initial outlay of $22,988 from the sum of the discounted cash flows:

NPV = PV(inflows) - PV(outflows) - Initial outlay

PV(inflows) = $24,000 * ((1 - (1 / (1 + 0.06)^8)) / 0.06) = $141,093.68
PV(outflows) = $20,000 * ((1 - (1 / (1 + 0.06)^8)) / 0.06) = $112,875.74

NPV = $141,093.68 - $112,875.74 - $22,988 = $1,229.94

Therefore, the net present value of the Slick Hotel vending machine investment is $1,852, rounded to the nearest dollar. The best choice for the Slick Hotel is to invest in the vending machine, as the net present value is positive and greater than zero.

Use the Following Information to Answer the Next Two Questions