(Ignore income taxes in this problem) The management of Urbine Corporation is considering the purchase of a machine that would cost $350,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $79,000 per year. The company requires a minimum pretax return of 14% on all investment projects. The net present value of the proposed project is closest to:

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the proposed project is closest to $(42,769). The net present value is calculated as the present value of the future cash flows minus the initial investment. The present value of the future cash flows is calculated as the sum of the present values of each year's cash flow. The present value of each year's cash flow is calculated as the cash flow multiplied by the present value factor. The present value factor is calculated as 1 / (1 + r)^n, where r is the discount rate and n is the number of years. In this case, the discount rate is 14% and the number of years is 6. The present value of the future cash flows is $407,231. The initial investment is $350,000. Therefore, the net present value is $407,231 - $350,000 = $(42,769).

(Ignore Income Taxes in This Problem) the Management of Urbine