Lopez Co.is interested in purchasing equipment that would improve its operational efficiency.The cost of the equipment is $400,000 with an estimated residual value of $30,000 and a useful life of ten years.The equipment is expected to fetch cash inflows of $60,000 a year.The company's minimum rate of return is 8 percent.The present value of $1 for ten years at 8 percent is 0.463,and the present value of an annuity of $1 at 8 percent and ten years is 6.710.
-Using the above information for Lopez,the net present value of the project is
A)$402,600.
B)$13,890.
C)$200,000.
D)$16,490.

Question

Lopez Co.is interested in purchasing equipment that would improve its operational efficiency.The cost of the equipment is $400,000 with an estimated residual value of $30,000 and a useful life of ten years.The equipment is expected to fetch cash inflows of $60,000 a year.The company's minimum rate of return is 8 percent.The present value of $1 for ten years at 8 percent is 0.463,and the present value of an annuity of $1 at 8 percent and ten years is 6.710. 
-Using the above information for Lopez,the net present value of the project is
A)$402,600.
B)$13,890.
C)$200,000.
D)$16,490.

Quizplus · Accepted Answer

The net present value (NPV) is calculated by finding the present value of cash inflows and subtracting the initial investment. The present value of cash inflows is $60,000 * 6.710 = $402,600. The present value of the residual value is $30,000 * 0.463 = $13,890. The total present value of inflows is $402,600 + $13,890 = $416,490. Subtracting the initial investment of $400,000 gives an NPV of $16,490.

Lopez CoIs Interested in Purchasing Equipment That Would Improve Its Operational