The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: The net present value for this investment is:

Question

The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:  The net present value for this investment is:

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to calculate the present value of cash inflows and outflows. The outflow is the cost of the machine, which is $380,000.

To calculate the present value of cash inflows, we need to know the expected annual cash inflow. The diagram shows that the expected annual cash inflow is $94,750.

Using the present value factor for an annuity of $1 at interest of 6% for 5 years (4.212), the present value of the expected annual cash inflow is: 
$94,750 x 4.212 = $398,984

Now we can calculate the net present value:

NPV = Present value of cash inflows - Present value of cash outflows 
NPV = $398,984 - $380,000 
NPV = $18,984

Since the NPV is positive, the investment is acceptable. Therefore, the best choice is A.

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