Question

The management of Arnold Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, 0.621, respectively. In addition to this information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 20,000 100,000 4 10,000 90,000 5 10,000 90,000 The net present value for this investment is a.negative $25,200. b.negative $124,800. c.positive $152,000. d.positive $25,200.

Answer 1

d.positive $25,200.

Explanation:

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

Year Income From Net Cash Flow Present value

Operations

1 $100,000 180,000 163620

2 40,000 120,000 99120

3 20,000 100,000 75100

4 10,000 90,000 61470

5 10,000 90,000 55890

Total Cash inflow present value 455,200

Initial cash outflow $430,000

Net present value $25,200

As we can see that the total cash inflow i.e $455,200 is greater than the initial investment is $430,000 that reflects the positive net present value i.e difference of $25,200 so the project should be accepted