The president of Nash Company is considering a proposal by the factory manager for the purchase of a machine for $72,500.The useful life would be eight years,with no residual scrap value.The use of the machine will produce a positive annual cash flow of $14,000 a year for eight years.An annuity table shows that the present value of $1 received annually for eight years and discounted at 10% is 5.335.The net present value of the proposal,discounted at 10%,is:

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by subtracting the initial investment from the present value of the cash inflows. The present value of the cash inflows is $14,000 * 5.335 = $74,690. Subtracting the initial investment of $72,500 from this gives an NPV of $74,690 - $72,500 = $2,190.

The President of Nash Company Is Considering a Proposal by the Factory