Question

(Ignore income taxes in this problem.) Beaver Corporation is investigating the purchase of a new threading machine that costs $18,000. The machine would save about $4,000 per year over the present method of threading component parts, and would have a salvage value of about $3,000 in 6 years when the machine would be replaced. The company's required rate of return is 12%. The machine's net present value is closest to:

Answer 1

$-34.77

Step-by-step explanation:

The net present value is the present value of after tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator:

Cash flow in year 0 = $-18,000

Cash flow each year from year 1 to 5 = $4,000

Cash flow in year 6 = $4,000 + $3,000 = $7,000

I = 12%

NPV = $-34.77

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you

Answer 2

The NPV of the machine is closest to -$34.48

Step-by-step explanation:

The net present value (NPV) of the project is the present value of the future net cash flows expected from the project less the initial cost of the project. The cash inflows from this project are the cost savings that are in a form of annuity and an amount for salvage value receivable at end of year 6. Thus, the NPV of the project is,

NPV = 4000 * [ (1 - (1+0.12)^-6) / 0.12 ] + 3000 / (1+0.12)^6 - 18000

NPV = - $34.48