Sanders Company would like to purchase a specialized production machine for $1,000,000.The machine is expected to have a life of five years,and a salvage value of $300,000.Annual maintenance costs will total $50,000.Annual labor savings are predicted to be $280,000.The company's required rate of return is 15 percent.
Ignoring the time value of money,what is the net cash inflow or (outflow)resulting from this investment opportunity?

Question

Quizplus · Accepted Answer

The net cash inflow is calculated as follows: Total savings over 5 years = $280,000 * 5 = $1,400,000. Total maintenance costs over 5 years = $50,000 * 5 = $250,000. Salvage value = $300,000. Net cash inflow = $1,400,000 - $250,000 + $300,000 - $1,000,000 = $450,000.

Sanders Company Would Like to Purchase a Specialized Production Machine