The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $380,000.The investment is expected to generate $125,000 in annual cash flows for a period of four years.The required rate of return is 12%.The old machine can be sold for $20,000.The machine is expected to have zero value at the end of the four-year period.What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered.
A) $19,750; yes
B) $35,775; no
C) $360,000; yes
D) $163,005; no

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the investment, we need to calculate the present value of the cash inflows and outflows. Using a financial calculator or Excel, we can calculate the NPV as follows:

CF0 = -380,000 (initial investment)
CF1-4 = 125,000
I/Y = 12
NPV = $19,750

Since the NPV is positive, the investment is expected to generate a return greater than the required rate of return. Therefore, the company would want to purchase the new machine.

Option B is incorrect because the NPV is positive, so the company would want to purchase the new machine.

Option C is incorrect because the NPV is much higher than the initial investment, which is not possible.

Option D is incorrect because the NPV is positive, so the company would want to purchase the new machine.

The Zeron Corporation Wants to Purchase a New Machine for Its