Question

Tangen Corporation is considering the purchase of a machine that would cost $380,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $80,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $104,000. The company requires a minimum pretax return of 14% on all investment projects. The net present value of the proposed project is closest to:

Answer 1

Answer: $60,872

Step-by-step explanation:

First calculate the present value of the cash benefits of this investment:

= Present value of cost savings + present value of salvage value

= (104,000 * Present value interest factor of Annuity,6 years, 14%) + [80,000 / (1 + 14%)⁶]

= (104,000 * 3.8887) + 36,446.92381

= $‭440,872

Net Present value = Present value of cash benefits - Investment cost

= 440,872 - 380,000

= $60,872