Stern Corporation is considering the purchase of a machine that would cost $270,

Question

Stern Corporation is considering the purchase of a machine that would cost $270,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $38,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $54,000. The company requires a minimum pretax return of 16% on all investment projects.

The present value of the annual cost savings of $54,000 is closest to:
$14,202
$946,093
$486,000
$248,778

The net present value of the proposed project is closest to:
$16,778
-$11,228
-$21,222
-$42,700

Explanation / Answer

all the factors are from present value table for the 16%

A) Present Value = 54,000 * (.862 + .743 + .641 + .552 + .476 + .410 + .354 + .305 + .263)
Present Value = 54,000 * 4.606 = 248,724
Present Value = 248,724............(answer)
**Note if this is a multiple choice question then look for answer that is between 248,700 to 248,800, because different books have slightly different table values.

B) NPV = -270,000 + 54,000*4.606 + 38,000 *0.263
NPV = -270,000 + 248,724 + 9,949
NPV = -11,327....................(answer)
**Note if this is a multiple choice question then look for answer that is between -11,350 to -11,250, because different books have slightly different table values.

This is the table is used: http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf

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