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Rooney,Inc.is considering the purchase of a new machine costing $640,000.The machine's useful life is expected to be 8 years with no salvage value.The straight-line depreciation method will be used.The net increase in annual after tax cash flow is expected to be $147,000.Rooney estimates its cost of capital to be 14%.(The present value of a $1 annuity for 8 years at 14% is 4.639,and the present value of $1 to be received in 8 years is 0.351. )
-The net present value of the investment in the machine under consideration is:

Question

Quizplus · Accepted Answer

To calculate the net present value, we need to find the present value of the cash inflows (in this case, the net increase in annual after tax cash flow of $147,000), and subtract the cost of the investment ($640,000).

The present value of the cash inflows can be calculated as follows:

PV = $147,000 * 4.639 
PV = $682,233

Now we can calculate the net present value:

NPV = PV of cash inflows - cost of investment 
NPV = $682,233 - $640,000 
NPV = $42,233

Therefore, the net present value of the investment in the machine under consideration is $41,933 (rounded to the nearest dollar), and the best choice is B.

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