(Ignore income taxes in this problem.) Meharg Corporation is considering the purchase of a machine that would cost $120,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $25,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $30,000. The company requires a minimum pretax return of 10% on all investment projects.
-The net present value of the proposed project is closest to:

Question

(Ignore income taxes in this problem.) Meharg Corporation is considering the purchase of a machine that would cost $120,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $25,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $30,000. The company requires a minimum pretax return of 10% on all investment projects. 
-The net present value of the proposed project is closest to:

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the project, we need to find the present value (PV) of the cash inflows and outflows, and subtract the PV of outflows from that of inflows.

PV of inflows:
Year 1: $5,000/(1+0.08)^1 = $4,629.63
Year 2: $6,000/(1+0.08)^2 = $5,082.64
Year 3: $7,000/(1+0.08)^3 = $5,821.06

Total PV of inflows = $4,629.63 + $5,082.64 + $5,821.06 = $15,533.33

PV of outflows:
Year 0: -$25,000
Year 1: -$2,000/(1+0.08)^1 = -$1,851.85
Year 2: -$3,000/(1+0.08)^2 = -$2,529.28

Total PV of outflows = -$25,000 - $1,851.85 - $2,529.28 = -$29,381.13

NPV = $15,533.33 - $29,381.13 = -$13,847.80

Since the NPV is negative, the proposed project should be rejected. The closest answer option is C) $9,255, but this is not the correct NPV for the project.

(Ignore Income Taxes in This Problem