Chicago Co. is interested in purchasing a machine that would improve its operati

Question

Chicago Co. is interested in purchasing a machine that would improve its operational efficiency. The cost is $200,000 with an estimated residual value of $20,000 and a useful life of eight years. Cash inflows are expected to increase by $40,000 a year. The company's minimum rate of return is 10 percent. The present value of $1 for eight years at 10 percent is 0.467, and the present value of an annuity of $1 at 10 percent and eight years is 5.335.

The net present value of the project is a. $22,740. b. $120,100. c. $93,400. d. $74,520. Chicago Co. is interested in purchasing a machine that would improve its operational efficiency. The cost is $200,000 with an estimated residual value of $20,000 and a useful life of eight years. Cash inflows are expected to increase by $40,000 a year. The company's minimum rate of return is 10 percent. The present value of $1 for eight years at 10 percent is 0.467, and the present value of an annuity of $1 at 10 percent and eight years is 5.335.

The net present value of the project is a. $22,740. b. $120,100. c. $93,400. d. $74,520.

Explanation / Answer

40,000*5.335 + 20,000*0.467 - 200,000 = 22740 answer: A, 22740

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