Sunny Days Corporation is deciding whether to automate one phase of its production process. The equipment has a six-year life and will cost $370,000. Projected net cash inflows from the equipment are as follows: Sunny Days Corporation's hurdle rate is 12%. Assume the residual value is zero.
What is the net present value of the equipment?
Present Value of $1
Present Value of Annuity of $1

Question

Sunny Days Corporation is deciding whether to automate one phase of its production process. The equipment has a six-year life and will cost $370,000. Projected net cash inflows from the equipment are as follows:  Sunny Days Corporation's hurdle rate is 12%. Assume the residual value is zero.
What is the net present value of the equipment?
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 each year's cash inflow and subtract the initial cost of the equipment.

Using the provided present value of $1 table, we can calculate the present value factor for each year:

Year 1: 0.893
Year 2: 0.797
Year 3: 0.712
Year 4: 0.636
Year 5: 0.567
Year 6: 0.507

Next, we multiply each year's cash inflow by the present value factor and sum the results:

($100,000 x 0.893) + ($120,000 x 0.797) + ($140,000 x 0.712) + ($160,000 x 0.636) + ($180,000 x 0.567) + ($200,000 x 0.507) = $825,614

To find the net present value, we subtract the initial cost of $370,000:

$825,614 - $370,000 = $455,614

Since the net present value is positive, this project would be a good investment for Sunny Days Corporation. The correct answer is D.

Sunny Days Corporation Is Deciding Whether to Automate One Phase