Question

The management of urbine corporation is considering the purchase of a machine that would cost $340,000 would last for 4 years, and would have no salvage value. the machine would reduce labor and other costs by $80,000 per year. the company requires a minimum pretax return of 9% on all investment projects. (ignore income taxes in this problem.) click here to view exhibit 13b-1 and exhibit 13b-2 to determine the appropriate discount factor(s) using tables. the net present value of the proposed project is closest to: (round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

Answer 1

The net present value of the proposed project is closest to -$80,822.

Since the project saves $80,000 in costs each year, we treat these savings income for the next 4 years. We then calculate the Present value Interest Factor of an annuity using the formula :

PVIF of an annuity = { [ 1 - [ (1+r)⁻ⁿ ] } ÷ r

PVIF of an annuity = { [ 1 - [ (1.09)⁻⁴ ] } ÷ 0.09

PVIF of an annuity = 3.240 (rounded to three decimals)

PV of the cost savings = (3.240*80000) = $2,59,178 (rounded to nearest $)

NPV = PV of cost savings - Value of investment

NPV = 2,59,178 - 3,40,000