Interior Products, Inc. is evaluating the purchase of a new machine to use in its manufacturing process. The new machine would cost $37,000 and have a useful life of 5 years. At the end of the machine's life, it would have a residual value of $2600. Annual cost savings from the new machine would be $12,200 per year for each of the six years of its life. Interior Products, Inc. has a minimum required rate of return of 16% on all new projects. The net present value of the new machine would be closest to: (Round any intermediary calculations and your final answer to the nearest dollar.) Present Value of $1
Present Value of Annuity of $1

Question

Interior Products, Inc. is evaluating the purchase of a new machine to use in its manufacturing process. The new machine would cost $37,000 and have a useful life of 5 years. At the end of the machine's life, it would have a residual value of $2600. Annual cost savings from the new machine would be $12,200 per year for each of the six years of its life. Interior Products, Inc. has a minimum required rate of return of 16% on all new projects. The net present value of the new machine would be closest to: (Round any intermediary calculations and your final answer to the nearest dollar.) Present Value of $1
 Present Value of Annuity of $1

Quizplus · Accepted Answer

To calculate the net present value, we need to find the present value of the cash inflows (annual cost savings) and outflows (cost of the machine and its residual value). 
PV of cash inflows (annuity): 
Using the formula for present value of an annuity, we get:
PV = $12,200 x (PVIFA 16%,6) = $45,814

PV of cash outflows:
The initial cost of the machine is $37,000. 
The present value of the residual value (using the formula for present value of a single amount) is:
PV = $2,600 / (1+16%)^5 = $972.44

Net present value:
NPV = PV of cash inflows - PV of cash outflows
NPV = $45,814 - $37,972.44
NPV = $7,841.56
Because the NPV is positive, this project would be accepted. The closest answer is option B, $4,181.