Question

Jones Plumbing can purchase a new machining tool for $20,000 that will provide an annual net cash flow of $5,000 per year for five years. Calculate the NPV of the tool if the required rate of return is 20%

a. $1,514
b. $4,163
c. ($5,047)
d. ($2,664)

Answer 1

The question asks for the calculation of Net Present Value (NPV) of a new machining tool for Jones Plumbing, given an initial investment, annual net cash flow, and a required rate of return. Using the formula for NPV and the given data, the NPV can be calculated by discounting the annual cash flow by the required return rate, summing them up, and then subtracting the initial investment. The NPV of the tool is approximately $1,514. Therefore correct option is A

Step-by-step explanation:

To calculate the NPV (Net Present Value) of the tool, we need to discount the future cash flows to their present value and subtract the initial investment. The formula for NPV is:

NPV = CF1/(1+r) + CF2/(1+r)^2 + ... + CFn/(1+r)^n - initial investment

In this case, the annual net cash flow is $5,000 for five years, and the required rate of return is 20%. The initial investment is $20,000. Plugging these values into the formula, we get:

NPV = 5000/(1+0.2) + 5000/(1+0.2)^2 + 5000/(1+0.2)^3 + 5000/(1+0.2)^4 + 5000/(1+0.2)^5 - 20000

= $1,514.

the NPV of the tool is approximately $1,514.