UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales minus cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow):

In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%. (Ignore income taxes in this problem.)
-What is the net present value of ALL cash flows associated with this investment,rounded to the nearest dollar?

Question

UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales minus cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow):

In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%. (Ignore income taxes in this problem.)
-What is the net present value of ALL cash flows associated with this investment,rounded to the nearest dollar?

Quizplus · Accepted Answer

To calculate the net present value of the investment, we need to discount all the cash flows (positive and negative) to their present values and then sum them up.

Using a financial calculator or Excel, the net present value (NPV) of the cash flows can be calculated as follows:

NPV = -200,000 + (32,000/(1+0.1)^1) + (44,000/(1+0.1)^2) + (52,000/(1+0.1)^3) + (70,000/(1+0.1)^4) + (80,000/(1+0.1)^5) + (90,000/(1+0.1)^6) + (100,000/(1+0.1)^7) + (110,000/(1+0.1)^8) + (120,000/(1+0.1)^9) + (130,000/(1+0.1)^10) + (140,000/(1+0.1)^11) + (155,000/(1+0.1)^12) + (15,000/(1+0.1)^12)

NPV = $382,735

Since the NPV is positive, the investment is expected to generate a return that exceeds the discount rate, and therefore should be accepted. The correct answer is (C).

UR Company Is Considering Rebuilding and Selling Used Alternators for Automobiles