Question

Hal E. Burton hospital can purchase a new machine (to be placed in an undisclosed location) for $1,000,000 that will provide an annual net cash flow of $300,000 per year for five years. The machine will be sold for $100,000 at the end of year five. What is the net present value of the machine if the required rate of return is 11.5%. (Round your answer to the nearest $1,000.)

Answer 1

Answer:

$153,000

Explanation:

The computation of the net present value is shown below:

= Present value of all cash inflows including salvage value after considering the discount factor - initial investment

where,

Present value  is

= Four year cash inflows × PVIFA factor for 11.5% for 4 years + (one year cash inflow + salvage value) × discount rate for 11.50% at five year

= $300,000 × 3.0696  + ($300,000 + $100,000) × 0.5803

= $920,880 + $232,120

= $1,153,000

And, the initial investment is $1,000,000

So, the net present value is

= $1,153,000 - $1,000,000

= $153,000