Question

The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:

Year Income from
Operations Net Cash
Flow
1 $20,000 $95,000
2 20,000 95,000
3 20,000 95,000
4 20,000 95,000
5 20,000 95,000

The net present value for this investment is

a.$19,875

b.$(19,875)

c.$20,140

d.$(20,140)

Answer 1

Answer:

c.$20,140

Explanation:

Net present value is the Net value all cash inflows and outflows in present value term. All the cash flows are discounted using a required rate of return.

Initial investment in the machine is the cash outflow and the net cash flows are the values that are used for Net present value.

Net Present Value =  Present value of net cash flows - Initial Investment

Net Present Value =  ( 95,000 x 4.212 ) - $380,000

Net Present Value =  $400,140 - $380,000

Net Present Value =  $20,140