A machine is expected to produce annual savings in cash operating costs of $400,000 for the next six years.If the company has a 10% after-tax hurdle rate and is subject to a 30% income tax rate,the correct discounted net cash flow would be:

Question

Quizplus · Accepted Answer

First, we need to calculate the present value of the savings using the formula PV=C/(1+r)^t, where PV is the present value, C is the cash operating cost savings per year, r is the after-tax hurdle rate, and t is the time period.

PV = $400,000/(1-0.3)*(1-0.1) * [(1- (1/ (1+0.1)^6 )) / 0.1]

PV = $1,219,400

The discounted net cash flow is the present value of the savings minus the initial investment, which is not given in the question.

Therefore, the correct answer is C.

A Machine Is Expected to Produce Annual Savings in Cash