Olsen Inc. purchased a $600,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the next 10 years. To encourage capital investments, the government exempts taxes on profits from new investments in this type of machinery. This legislation most likely will remain in effect in the foreseeable future. The equipment is expected to have 10 years of useful life and no salvage value at the end of this 10-year period. The firm uses straight-line depreciation. The net cash inflow is expected to be $144,000 each year. Olsen uses a discount rate of 10% in evaluating its capital investments.

The estimated net present value (NPV) of this proposed investment (rounded to the nearest thousand) is: (Note: the PV annuity factor from Table 2, Appendix C, 10%, 10 years is 6.145.)

Question

The estimated net present value (NPV) of this proposed investment (rounded to the nearest thousand) is: (Note: the PV annuity factor from Table 2, Appendix C, 10%, 10 years is 6.145.)

Quizplus · Accepted Answer

To calculate the NPV, we need to find the present value of the net cash inflows for 10 years and subtract the initial investment of $600,000.

Using the PV annuity factor of 6.145 from Table 2, we can find the present value of the net cash inflows as:

$144,000 x 6.145 = $883,080

Therefore, the NPV is:

NPV = $883,080 - $600,000 = $283,080

Rounding to the nearest thousand, the estimated NPV is $285,000. Since the NPV is positive, the investment is expected to generate a return greater than the required rate of return of 10%. Therefore, Olsen should undertake the investment.

Olsen Inc Purchased a $600,000 Machine to Manufacture a Specialty Tap