Question

The management of Penfold Corporation is considering the purchase of a machine that would cost $440,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $102,000 per year. The company requires a minimum pretax return of 16% on all investment projects. The net present value of the proposed project is closest to (Ignore income taxes.): Click here to view Exhibit 12B-1 and Exhibit 12B-2 to determine the appropriate discount factor(s) using the tables provided. Multiple Choice $(28,022) $96,949 $(79,196) $274,000

Answer 1

Answer:

$(28,022)

Explanation:

The computation of the net present value is shown below:

Year Particulars Cost PV Annuity factor of $1 at 16% PV of cash flows

0 Initial machine Cost        ($440,000) 1.000 ($440,000.00)

1 - 7  Labor and other cost Saving $102,000 4.039  $411,978.00

Net Present value                                                     (28,022.00)

Refer to the PVIFA factor table

Since the net present value is negative so the project should not be accepted