Question

The management of Cooper Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0. 909, 0. 826, 0. 751, 0. 683, 0. 621, respectively. In addition to this information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 20,000 100,000 4 10,000 90,000 5 10,000 90,000 The present value index for this investment is a.1.45. b.1.08. c.0.92. d.0.36.

Answer 1

Answer:

b.1.08.

Explanation:

The computation of the present value index is shown below;

As we know that

Present Value Index = Present value of Net Cash Inflow ÷ Initial Cash outflow

where,

Initial investment = $420,000

And, the present value of net cash inflows are

Year        Cash Flow (in $)       PVF at 10%            Present Value (in $)

1               180,000                   0.909                     163,620

2              120,000                   0.826                      99,120

3               100,000                  0.751                        75,100

4                90,000                   0.683                      61,470

5                90,000                   0.621                       55,890

TOTAL                                                                       455,200

So, the present value index is

= $455,200 ÷ $420,000

= 1.08