he following data pertain to an investment proposal (Ignore income taxes.): Cost of the investment $ 60,000 Annual cost savings
$ 18,000 Estimated salvage value $ 7,000 Life of the project 5 years Discount rate 13 % Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. The net present value of the proposed investment is closest to:
1 answer:
Answer: $7,107
Explanation:
The Net Present value of a project is the Present value of the benefits associsted with the project minus the present value of the cost. This is a very useful tool in Project analysis.
We are given the following,
Initial cost = $60,000
Annual savings = $18,000
Salvage Value = $7,000
Discount rate = 13%.
When calculating the present value of a series of equal cashflows, it is faster to use the Present Value of an Annuity formula.
The Present Value Interest Factor of an Annuity Table is a table that calculated the present value factors at different rates for easier calculations. I have attached one here.
The project will give out equal paymensts for 5 years at 13%. Looking at the table, we see that 13% at 5 years is a factor of 3.5172.
Calculating therefore we have,
= 18,000 * 3.5172
= $63,309.60
This is the present value of the savings.
We need to take the Present Value of the Salvage Value as well as it is a benefit.
= 7,000 / ( 1+13%)^5
= 7,000 / 1.13^5
= $3,799.32
Calculating the NPV we have,
= 63,309.60 + 3,799.32 - 60,000
= $7,108.92
The Net Present Value of the proposed investment is $7,107
I have attached the complete question to show the options.
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