Marsh Products is evaluating an investment in new production machinery. The initial investment is $250,000 and will yield cash flows of $60,000 per year for a 5 year period. At the end of 5 years, the machinery will be sold and has expected residual value of $40,000. Marsh uses a discount rate of 7%. What is the net present value of the investment?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to find the present value of each year's cash flow, including the residual value, using the discount rate of 7%. 
PV of cash flows:
Year 1: $60,000/(1+0.07)^1 = $56,074.77
Year 2: $60,000/(1+0.07)^2 = $52,424.34
Year 3: $60,000/(1+0.07)^3 = $48,996.05
Year 4: $60,000/(1+0.07)^4 = $45,779.43
Year 5: $60,000/(1+0.07)^5 = $42,764.15
Residual value: $40,000/(1+0.07)^5 = $28,396.78
NPV = sum of PV of cash flows - initial investment
NPV = $56,074.77 + $52,424.34 + $48,996.05 + $45,779.43 + $42,764.15 + $28,396.78 - $250,000
NPV = $24,520.52
Therefore, the net present value of the investment is $24,520, making option D the best choice.

Marsh Products Is Evaluating an Investment in New Production Machinery