Final answer:
To determine the NPV of the machine Sal Minella is considering, we calculate the present value of the cash flows and residual value, then subtract the machine's cost, resulting in an NPV of $6,818.
Step-by-step explanation:
To calculate the net present value (NPV) of the machine that Sal Minella is considering purchasing, we will discount the annual cash flows of the machine using the present value of an ordinary annuity and subtract the initial cost of the machine.
Given the annual cash flow is $16,000, the present value of an ordinary annuity for 4 years at a 10% discount rate is 3.170. Thus, we can find the present value of the cash flows over the 4 years:
Present Value of Cash Flows
= Annual Cash Flow x Present Value of Annuity
= $16,000 x 3.170
=
$50,720
The residual value at the end of 4 years also contributes to the NPV, but it needs to be discounted as a single sum using the present value of $1 at 10% for 4 years:
Present Value of Residual Value
= Residual Value x Present Value of $1
= $6,000 x 0.683
=
$4,098
Finally, we subtract the initial cost of the machine from the total present value to find the NPV:
Net Present Value (NPV)
= (Present Value of Cash Flows + Present Value of Residual Value) - Initial Cost
= ($50,720 + $4,098) - $48,000
= $54,818 - $48,000
=
$6,818
Therefore, the correct answer is C. $6,818.