Question

9. Mackenzie PLC is considering expanding a production line. The new equipment for the line will cost $255,000. In addition, the cost of delivery is $12,250 and there is an annual maintenance contract for $1,500. The new line is expected to generate cash flows for the next four years of 65,000; 98,000; 126,000; and 132,000. Mackenzie's discount rate for the project is 9 3/8%. The net present value of the project is closest to:

Answer 1

Answer:

Net Present Value = $59,632.78

Explanation:

The net present value NPV) of a project is the present value of cash inflow less the present value of cash outflow of the project.

NPV = PV of cash inflow - PV of cash outflow

Present value of cash inflow:

65,000 × (1.09375)^(-1) + 98000 ×(1.09375)^(-2)+ 126,000 ×(1.09375)^(-3)+  132,000 × (1.09375)^(-4)= 326882.7792

PV of annual maintenance cost :

=1,500 × (1- 1.09375^(-4))/0.09375

=4819.84773

NPV = 26882.7792  - 4819.84773 - (255,000+12250)

= 59,632.78