Question

The management of Arnold Corporation is considering the purchase of a new machine costing $430,000. 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 net present value for this investment is a.negative $25,200. b.negative $124,800. c.positive $152,000. d.positive $25,200.

Answer 1

Answer:

d.positive $25,200.

Explanation:

The computation of net present value for this investment is shown below:-

Year      Income From        Net Cash Flow         Present value

               Operations

1               $100,000                180,000                   163620

2              40,000                    120,000                   99120

3               20,000                   100,000                   75100

4               10,000                    90,000                    61470

5               10,000                    90,000                    55890

Total Cash inflow present value                            455,200

Initial cash outflow $430,000

Net present value $25,200

As we can see that the total cash inflow i.e $455,200 is greater than the initial investment is $430,000 that reflects the positive net present value i.e difference of $25,200 so the project should be accepted