Question

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. 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 $18,750 $93,750
2 18,750 93,750
3 18,750 93,750
4 18,750 93,750
5 18,750 93,750
The net present value for this investment is:__________.
A) Negative $19,875
B) Positive $118,145
C) Positive $19,875
D) Negative $118,145

Answer 1

C) Positive $19,875

Step-by-step explanation:

The computation of net present value for this investment is shown below:-

Net present value = present value of cash inflows - Present value of cash outflow

= Annual cash inflow × present value annuity factor for 5 years at 6% - $375,000

= ($93,750 × 4.212) - $375,000

= $394,875 - $375,000

= $19,875

Therefore for computing the net present value we simply applied the above formula.