Question

XYZ Corporation is considering the purchase of a machine that would cost $320,000, would last for 5 years, and would have no salvage value. The machine would reduce labor and other costs by $75,000 per year. The company requires a minimum pretax return of 12% on all investment projects. The net present value of the proposed project is closest to:

Answer 1

XYZ corporation has Net present value of -49641.78

Step-by-step explanation:

In order to get the net present value for XYZ corporation it is important is draw the timeline for cash flows.

0 -$320000

1 $75000

2 $75000

3 $75000

4 $75000

5 $75000

then using PVIF table value at 12% we will get the discounted value of cash flows.

Year Cash Flow Discount factor

0 -$320000 1.000

1 $75000 0.893

2 $75000 0.797

3 $75000 0.712

4 $75000 0.636

5 $75000 0.567

After getting the discount factor @ 12% from the PVIF table we will multiply the cash flow the with relevant discount factor to get discounted cash flows.

Year Cash Flow Discount factor Discounted cash Flows

0 -$320000 1.000 -$320000

1 $75000 0.893 $66964

2 $75000 0.797 $59790

3 $75000 0.712 $53384

4 $75000 0.636 $47664

5 $75000 0.567 $42557

at the end adding discounted cash flows will give us Net present value of $-49641