Question

Michael Corporation is evaluating a capital investment opportunity. This project would require an initial investment of $36,000 to purchase equipment. The equipment will have a residual value at the end of its life of $5000. The useful life of the equipment is 4 years. The new project is expected to generate additional net cash inflows of $19,000 per year for each of the four years. Michael's required rate of return is 10%. The net present value of this project is closest to:

Answer 1

$27,645

Step-by-step explanation:

The computation of the net present value is shown below

Net Present value = Present value of cash inflow + Present value of residual value - Initial investment

= $19,000 × 3.170 + $5,000 × 0.683 - $36,000

= $27,645

The 3.170 is the PVIFA factor for 4 years at 10% and the discount factor for 4 year at 10% is 0.683 and we considered the same