Use the information below to answer the following question(s).
Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below:
Note: Other than the initial investment, cash flows are end of period.
-Easton Ltd. is considering investing in a new piece of machinery for its factory. The machine costs $340,000 and is expected to last 7 years. It estimates that annual cash flows would be $82,000 and the equipment would have a salvage value of $13,000. The company's hurdle rate is 11%. What is the NPV of this investment? (Ignore income taxes.)
A) $87,625
B) $46,400
C) $52,660
D) $234,000
E) $247,000

Question

Use the information below to answer the following question(s).
Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below:
  Note: Other than the initial investment, cash flows are end of period.
-Easton Ltd. is considering investing in a new piece of machinery for its factory. The machine costs $340,000 and is expected to last 7 years. It estimates that annual cash flows would be $82,000 and the equipment would have a salvage value of $13,000. The company's hurdle rate is 11%. What is the NPV of this investment? (Ignore income taxes.)
A) $87,625 
B) $46,400 
C) $52,660 
D) $234,000 
E) $247,000

Quizplus · Accepted Answer

To calculate NPV, we need to find the present value (PV) of each cash flow, using the formula PV = CF/(1+r)^n, where CF is the cash flow, r is the discount rate, and n is the period.

Year 0: -$340,000 (initial investment)
Year 1-7: $82,000
Year 8: $13,000 (salvage value)

Using the NPV formula, we get:

NPV = -340,000 + (82,000/1.11)^1 + (82,000/1.11)^2 + ... + (82,000/1.11)^7 + (13,000/1.11)^8

NPV = -$340,000 + $58,832.40 + $52,260.71 + ... + $16,964.81 + $6,358.07

NPV = $52,659.87

Since the NPV is positive, this investment is expected to earn a return higher than the hurdle rate and is therefore a good investment. Choice C is the best choice.

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