Griffith Corporation
Griffith Corporation is considering an investment in a labor-saving machine.Information on this machine follows:
$\begin{array}{ll}
\text { Cost } & \$ 30,000 \
\text {Salvage value in five years } & \$0 \
\text { Estimatedlife } &5 years \
\text { Annual depreciation} &\$6,000 \
\text { Anmual reduction in existing costs } &\$8,000 \
\end{array}$

Refer to Griffith Corporation.Assume for this question only that Griffith Corporation uses a discount rate of 16 percent to evaluate projects of this type.What is the project's net present value? Present value tables or a financial calculator are required.

Question

Griffith Corporation
Griffith Corporation is considering an investment in a labor-saving machine.Information on this machine follows:
$\begin{array}{ll}
\text { Cost  } & \$ 30,000  \
\text {Salvage value in five years } &  \$0 \
\text { Estimatedlife } &5 years \
\text { Annual depreciation} &\$6,000 \
\text { Anmual reduction in existing costs } &\$8,000 \
\end{array}$

Refer to Griffith Corporation.Assume for this question only that Griffith Corporation uses a discount rate of 16 percent to evaluate projects of this type.What is the project's net present value? Present value tables or a financial calculator are required.

Quizplus · Accepted Answer

The net present value (NPV) of the project can be calculated by finding the present value (PV) of the annual savings and subtracting the initial investment. The annual savings of $8,000 over 5 years at a discount rate of 16% can be calculated using the present value of an annuity formula or a financial calculator. Using a present value of an annuity table or calculator, the PV factor for 5 years at 16% is approximately 3.274. Thus, the PV of the savings is $8,000 * 3.274 = $26,192. Subtracting the initial investment of $30,000 gives an NPV of $26,192 - $30,000 = -$3,808, which rounds to -$3,806.

Griffith Corporation Griffith Corporation Is Considering an Investment in a Labor-Saving

Griffith Corporation
Griffith Corporation Is Considering an Investment in a Labor-Saving