Question

"Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. There is no salvage value for the equipment. If the hurdle rate is 10%, what is the approximate net present value

Answer 1

Answer:

The options are:

a. negative $28,940 b. positive $28,940 c. zero d. positive $300,000

The correct option is A,-$28,940

Explanation:

The net present value of proposed purchase of new piece of equipment is the present of cash inflows minus the initial purchase cost of the equipment of $900,000

The inflows would be discounted using the discount rate given as 10%

The discount factor=1/(1+r)^n

r is the hurdle rate of 10%

n is the  year to which the inflow relates.

net  present value=-$900,000+$200,000/(1+10%)^1++$200,000/(1+10%)^2++$200,000/(1+10%)^3++$200,000/(1+10%)^4++$200,000/(1+10%)^5++$200,000/(1+10%)^6=

-$28,947.86

$28,940 is the closest to $28,947.86