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.
-Upper Darby Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $150,000.The annual cost savings if the new machine is acquired will be $40,000.The machine will have a 5-year life, at which time the terminal disposal value is expected to be $20,000.Upper Darby Park Department is assuming no tax consequences.If Upper Darby Park Department has a required rate of return of 10%, which of the following is closest to the net present value of the project?
A)$1,632
B)$12,418
C)$14,050
D)$150,000
E)$16,050

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the investment, we need to discount the cash inflows and outflows back to their present value using the required rate of return of 10%.

The initial cash outflow is $150,000 for the cost of the machine. The annual cash inflow is $40,000, and this occurs for five years, so the total cash inflow is $200,000 ($40,000 x 5).

The terminal disposal value of $20,000 occurs at the end of year five. We need to discount this value back to its present value using the required rate of return.

NPV = -$150,000 + ($40,000 / 1.10) + ($40,000 / 1.10^2) + ($40,000 / 1.10^3) + ($40,000 / 1.10^4) + (($20,000 / 1.10^5))

NPV = -$150,000 + $36,364 + $33,058 + $30,051 + $27,319 + $12,050

NPV = $8,842

Therefore, the closest answer is C) $14,050, which is $8,842 rounded up to the nearest thousand.

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