Question

The management of Penfold Corporation is considering the purchase of a machine that would cost $270,000, would last for 5 years, and would have no salvage value. The machine would reduce labor and other costs by $60,000 per year. The company requires a minimum pretax return of 12% on all investment projects. Click here to view Exhibit 7B-1 and Exhibit 7B-2 to determine the appropriate discount factor(s) using the tables provided. The net present value of the proposed project is closest to (Ignore income taxes.): (Round your intermediate calculations and final answer to the nearest whole dollar amount.) Multiple Choice $(11,700) $(29,886) $(77,514) $(53,700)

Answer 1

Answer:

$(53,700)

Explanation:

The computation of the net present value is given below:

Given that

Initial investment is $270,000

Time period is 5 years

Annual cash flows is $60,000 per year

Discounting rate is 12%

Now the net present value is

Year         cash flows             discount rate at 12%      Present value

1-5             $60,000                  3.605                             $216,300

Less:

Initial investment                                                               $270,000

Net present value                                                            ($53,700)