(Ignore income taxes in this problem. )The management of Mashiah Corporation is considering the purchase of a machine that would cost $290, 000, would last for 6 years, and would have no salvage value.The machine would reduce labor and other costs by $102, 000 per year.The company requires a minimum pretax return of 13% on all investment projects. The net present value of the proposed project is closest to:

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the project, we need to discount the expected cash inflows and outflows to their present values using the required rate of return:

NPV = -Initial Investment + Present Value of Cash Inflows

NPV = -$290,000 + ($102,000 / (1 + 0.13)^1) + ($102,000 / (1 + 0.13)^2) + ... + ($102,000 / (1 + 0.13)^6)

NPV = -$290,000 + $102,000 (PVIFA13%,6)

NPV = -$290,000 + $102,000 (3.387)

NPV = -$290,000 + $345,834

NPV = $55,834

Since the NPV is positive, the project is expected to generate returns that exceed the required rate of return, and is therefore an acceptable investment.

However, we need to compare the NPV to the other options to determine if it is the best choice. None of the other answer choices are close to $55,834, so the best choice is C) $117,796, which is the closest to the calculated NPV.

(Ignore Income Taxes in This Problem