Use the information below to answer the following question(s).Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine.The existing machine is operable for three more years and will have a zero disposal price.If the machine is disposed of now, it may be sold for $30,000.The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project.The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000.The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs.The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem.
-Investment A requires a net investment of $600,000.The required rate of return is 10 percent for the three-year annuity.What are the annual cash inflows if the net present value equals 0?
A)$184,842
B)$241,269
C)$249,791
D)$271,316
E)$360,000

Question

Quizplus · Accepted Answer

We can use the formula for net present value to solve for the annual cash inflows that result in a net present value of 0:
0 = -600,000 + (50,000 + (150,000 / 1.1)) / 1.1 + (150,000 / 1.1^2) + (150,000 / 1.1^3) + (20,000 / 1.1^3)
Solving for the annual cash inflows results in approximately $241,269. Therefore, Choice B is the best choice.

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