Answer:
The firm should: ___________
c. Reject the project because the NPV is negative $120,921
Explanation:
a) Data and Calculations:
Pro Forma Income Statement:
Sales $237,000
Total Cost 137,000
Depreciation 100,000
EBIT $0
Taxes 0
Net income $0
Cost of machine = $500,000
Required rate of return = 10%
Annual revenue from new machine = $237,000
Annual operational costs = $137,000
Annual net cash flow = $100,000
Depreciation expense = $100,000
Annuity factor at 10% for 5 years = 3.791
PV Annuity of $100,000 = $100,000 * 3.791 = $379,100
NPV = $379,100 - $500,000 = $120,900
b) The Net present value of the project is $120,900 (the difference between the total present value of cash inflow of $379,100 and the initial cash outflow of $500,000).
