A machine costs $10,000, has a three-year life, and has an estimated salvage value of $1000. It will generate after-tax annual cash flows (ACF) of $6000 a year, starting next year. If your required rate of return for the project is 10%, what is the NPV of this investment? (Round your answer to the nearest $1.00.)
A) $9,000
B) $5,672
C) $5,157
D) -$1,500

Question

Quizplus · Accepted Answer

The Net Present Value (NPV) is calculated by discounting the future cash flows to their present value and subtracting the initial investment. The formula for NPV is: NPV = (ACF1 / (1+r)^1) + (ACF2 / (1+r)^2) + ... + (ACFn / (1+r)^n) - Initial Investment, where ACF is the after-tax annual cash flow, r is the discount rate (or required rate of return), and n is the number of periods.Given:- Initial investment = $10,000- ACF = $6,000 for 3 years- Salvage value = $1,000 at the end of year 3- r = 10% or 0.10Calculating each year's present value of ACF:Year 1: $6,000 / (1 + 0.10)^1 = $5,454.55Year 2: $6,000 / (1 + 0.10)^2 = $4,950.50Year 3: ($6,000 + $1,000) / (1 + 0.10)^3 = $5,267.40 (including salvage value)Sum of present values = $5,454.55 + $4,950.50 + $5,267.40 = $15,672.45NPV = Sum of present values - Initial investment = $15,672.45 - $10,000 = $5,672.45Rounded to the nearest $1.00, the NPV is approximately $5,672.

A Machine Costs $10,000, Has a Three-Year Life, and Has