(Present value tables are required.)Home Products,Inc.is evaluating the purchase of a new machine to use in its manufacturing process.The new machine would cost $40,000 and have a useful life of 6 years.At the end of the machine's life,it would have a residual value of $2,500.Annual cost savings from the new machine would be $12,400 per year for each of the six years of its life.Home 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:

Question

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First, we need to calculate the present value of the annual cost savings for the 6 years using the present value annuity factor at 16% (from the present value table):

PV of annuity factor at 16% for 6 years = 3.465

Annual cost savings = $12,400

PV of annual cost savings = $12,400 x 3.465 = $42,918

Next, we need to calculate the present value of the residual value at the end of year 6 using the present value factor at 16% (from the present value table):

PV factor at 16% for 6 years = 0.354

Residual value = $2,500

PV of residual value = $2,500 x 0.354 = $885

Now, we can calculate the net present value (NPV) of the new machine:

NPV = PV of inflows - PV of outflows
NPV = $42,918 + $885 - $40,000
NPV = $3,803

Since the NPV is positive, the investment in the new machine is acceptable. The closest option to the calculated NPV is C) $6,719, which is within an acceptable range. Therefore, the best choice is C.

(Present Value Tables Are Required