Final answer:
To calculate the initial investment of Benaflek Co., discount the annual cost savings to their present value, sum these up and adjust by the given NPV. The initial investment is found to be $37,356, which is option B of the provided choices.
Step-by-step explanation:
Calculating the Initial Investment of Benaflek Co.:
The student's question revolves around finding the initial investment for equipment purchased by Benaflek Co., given the net present value (NPV), cost savings for three years, and the company's required rate of return. To determine the initial investment, we need to discount the annual cost savings at the given rate of return and then adjust the initial investment by the net present value.
The cost savings for each year can be recalculated to their present values using the present value of an annuity factors given:
Year 1: $20,000 x 0.893 = $17,860Year 2: $16,000 x 0.797 = $12,752 Year 3: $12,000 x 0.712 = $8,544 Summing up these present values, we get $17,860 + $12,752 + $8,544 = $39,156. This is the total present value of cost savings.
Now, considering the net present value was $(1,800), we adjust the initial investment: Initial Investment = Total Present Value of Cost Savings - NPV = $39,156 - $(1,800) = $37,356.
So the initial investment by Benaflek Co. in the equipment was $37,356, which corresponds to option B.