Question

The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

Year Income from Operations Net Cash Flow
1 $100,000 $180,000
2 40,000 120,000
3 40,000 100,000
4 10,000 90,000
5 10,000 120,000

The net present value for this investment is:_______

a. $(126,800)
b. $(16,170)
c. $55,200
d. $36,400

Answer 1

b. $(16,170)

Step-by-step explanation:

The net present value of the investment is present value of net cash flows discounted at the company's desired rate of return of 10% minus the initial investment outlay of $490,000 as shown thus:

NPV=($180,000*0.909)+($120,000*0.826)+($100,000*0.751)+($90,000*0.683)+($120,000*0.621)-$490,000

NPV= $473,830-$490,000

NPV= $(16,170)

It is obvious that the correct option in this case is B