Question

Almendarez Corporation is considering the purchase of a machine that would cost $250,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $15,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $38,000. The company requires a minimum pretax return of 8% on all investment projects. (Ignore income taxes.)
The net present value of the proposed project is closest to:

Answer 1

Answer:

-$5,114.07

Explanation:

The computation of the net present value is shown below:

= Present value of all year cash flows - initial investment

where,

Present value of all year cash flows = Annual cash flows × PVIFA factor at 9 years for 8% + Salvage value × discount factor at 8%

= $38,000 × 6.2469  + $15,000 × 0.500248967

= $237,382.20 + $7,503.73

= $244,885.93

Refer to the PVIFA table and discount factor table

And, the initial investment is $250,000

So, the net present value is

= $244,885.93 - $250,000

= -$5,114.07