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, we need to find the present value of the future cash flows and subtract the initial investment.

The annual cash inflow is not given, but we can find it using the present value factor and the cost of the machine.

$380,000 ÷ 4.212 = $90,132.54 (annual cash inflow)

Now we can calculate the net present value:

PV of cash inflows = $90,132.54 x 4.212 = $379,999.05 (rounded to nearest cent)

Net present value = PV of cash inflows - Initial investment
Net present value = $379,999.05 - $380,000 = -$0.95

Since the net present value is negative, we should not make the investment. However, we need to add the option in the answer choices that shows the closest positive net present value. Therefore, choice A is the best choice.

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