Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight- line method. The expected net cash inflows from the investment are:
$$\begin{array} { | l | r | }
\hline \text { Year 1 } & \$ 160,000 \
\hline \text { Year 2 } & 130,000 \
\hline \text { Year 3 } & 100,000 \
\hline \text { Year 4 } & 55,000 \
\hline \text { Year 5 } & 40,000 \
\hline & \$ 485,000 \
\hline \begin{array} { l }
\text { Atlantic Company's required rate of } \
\text { return is 14\%. }
\end{array} & \
\hline
\end{array}$$ Note: Present value tables are needed.
What is the net present value of the investment?

Question

Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight- line method. The expected net cash inflows from the investment are:
$$\begin{array} { | l | r | } 
\hline \text { Year 1 } & \$ 160,000 \
\hline \text { Year 2 } & 130,000 \
\hline \text { Year 3 } & 100,000 \
\hline \text { Year 4 } & 55,000 \
\hline \text { Year 5 } & 40,000 \
\hline & \$ 485,000 \
\hline \begin{array} { l } 
\text { Atlantic Company's required rate of } \
\text { return is 14\%. }
\end{array} & \
\hline
\end{array}$$ Note: Present value tables are needed.
What is the net present value of the investment?

Quizplus · Accepted Answer

The net present value (NPV) of the investment is calculated by discounting the expected net cash inflows at the company's required rate of return (14%) and then subtracting the initial investment. The depreciation does not affect the cash flows directly, so it's not included in the NPV calculation. Using present value tables or a financial calculator to find the present value of each year's cash inflow at 14% and then summing those values gives the total present value of the cash inflows. Subtracting the initial investment of $360,000 from this total present value gives the NPV. Based on the given options and the process described, the correct NPV is $24,465 positive.

Atlantic Company Is Considering Investing in Specialized Equipment Costing $360,000