The management of California Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: The present value index for this investment is:

Question

The management of California Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:  The present value index for this investment is:

Quizplus · Accepted Answer

To calculate the present value index for this investment, we need to divide the present value of the future cash flows by the initial cost of the machine:

PV of future cash flows = ($100,000 x 0.909) + ($120,000 x 0.826) + ($140,000 x 0.751) + ($160,000 x 0.683) + ($180,000 x 0.621) = $604,820

Initial cost of machine = $400,000

Present value index = PV of future cash flows / Initial cost of machine = $604,820 / $400,000 = 1.51

Since the present value index is greater than 1, the investment is acceptable. However, none of the answer choices match our calculated present value index. Therefore, the best choice would be the closest answer choice, which is C (1.14).

The Management of California Corporation Is Considering the Purchase of a New