Question

The following data pertain to an investment proposal (Ignore income taxes.):

Cost of the investment $ 54,000
Annual cost savings $ 16,000
Estimated salvage value $ 7,000
Life of the project 5 years
Discount rate 12 %
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.
The net present value of the proposed investment is closest to:______ (Round your intermediate calculations and final answer to the nearest whole dollar amount.)
a. $7,649b. $31,000c. $3,680d. $3,969

Answer 1

The closest answer is option A,$7649

Step-by-step explanation:

The net present value of the investment is the present value of annual cost savings minus the initial cost of investment.

present of cash flow=cash flow/(1+r)^n

r is the discount rate of 12%

n is the year the cash flow relates to ,for instance year zero for the initial investment

NPV=-$54,000+$16,000/(1+12%)^1+$16,000/(1+12%)^2+$16,000/(1+12%)^3+$16,000/(1+12%)^4+($16,000+$7,000)/(1+12%)^5=$ 7,648.41

note that the project gives $7,000 in salvage value in year 5