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Helicopter Gear is planning to expand its product line,which requires investment of $475,200 in special-purpose machinery.The machinery has a useful life of six years and no salvage value.The estimated annual results of offering the new products are as follows:
All revenue from the new products and all expenses (except depreciation)will be received or paid in cash in the same period as recognized for accounting purposes.
-Compute the net present value of this proposed investment,using a discount rate of 12%.(An annuity table shows that the present value of $1 received annually for six years,discounted at 12%,is 4.111. )

Question

[The following information applies to the questions displayed below.]
Helicopter Gear is planning to expand its product line,which requires investment of $475,200 in special-purpose machinery.The machinery has a useful life of six years and no salvage value.The estimated annual results of offering the new products are as follows:
  All revenue from the new products and all expenses (except depreciation)will be received or paid in cash in the same period as recognized for accounting purposes.
-Compute the net present value of this proposed investment,using a discount rate of 12%.(An annuity table shows that the present value of $1 received annually for six years,discounted at 12%,is 4.111. )

Quizplus · Accepted Answer

First, we need to calculate the annual cash inflow from offering the new products:
Year 1: $150,000
Year 2: $175,000
Year 3: $225,000
Year 4: $260,000
Year 5: $300,000
Year 6: $310,000

Using the annuity table, we can find the present value factor for an annuity of $1 for six years at a discount rate of 12%, which is 4.111. Multiplying the annual cash inflows by the present value factor, we get the present value of the cash inflows:
Year 1: $150,000 x 4.111 = $616,650
Year 2: $175,000 x 4.111 = $719,425
Year 3: $225,000 x 4.111 = $925,725
Year 4: $260,000 x 4.111 = $1,069,960
Year 5: $300,000 x 4.111 = $1,233,300
Year 6: $310,000 x 4.111 = $1,275,210

Adding up the present value of the cash inflows, we get a total of $6,840,270.

To calculate the net present value, we need to subtract the initial investment of $475,200 from the total present value of the cash inflows. So:

Net Present Value = $6,840,270 - $475,200 = $6,365,070

Since the net present value is positive, the investment is expected to be profitable. However, the net present value is lower than some of the options, so the best choice is B.

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