Regina Corporation estimates that it can save $6 500 a year in cash operating costs for the next eight years if it buys a special purpose machine at a cost of $32 000. No residual value is expected. The firm's minimum desired rate of return is 9%. Compute the net present value (to the nearest whole dollar).

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the annual cash savings to their present value and subtracting the initial investment. Using the present value of an annuity formula or a financial calculator with the following inputs: annual cash savings of $6,500 for 8 years at a 9% discount rate, the present value of these cash flows is approximately $36,976. Subtracting the initial investment of $32,000 gives an NPV of approximately $3,976.

Regina Corporation Estimates That It Can Save $6 500 a Year