Question

Icy Peaks Sports makes snowboards. The company wants to add a new machine that would cost $80,000 and have a useful life of 5 years and no residual value. The company expects the machine will generate $24,000 annual cash inflows for 5 years. The discount rate is 10%. What is the net present value of the investment?

Answer 1

$10979.20

Step-by-step explanation:

The computation of the net present value is shown below:

= Present value of all yearly cash inflows after applying discount factor - initial investment

where,

Initial investment is $80,000

And, the present value would be

= Annual cash flows × PVIFA factor for 10 years at 5%

= $24,000 × 3.7908

= $90979.20

Since the annual cash flows are the same for the five years so we use the PVIFA table

Refer to the PVIFA table

Now put these values to the above formula

So, the value would be equal to

= $90979.20 - $80,000

= $10979.20