Preston Company requires a minimum return of 14% on all investments. The company

Question

Preston Company requires a minimum return of 14% on all investments.  The company can purchase a new machine at a cost of $80,000.  The new machine would generate cash inflows of $15,000 per year and have a 12-year useful life with no salvage value.  Compute the machine's net present value.  Is the machine an acceptable investment? The factor for 12 years at 14% from the present value of an annuity table is 5.660. Show your computations. Preston Company requires a minimum return of 14% on all investments.  The company can purchase a new machine at a cost of $80,000.  The new machine would generate cash inflows of $15,000 per year and have a 12-year useful life with no salvage value.  Compute the machine's net present value.  Is the machine an acceptable investment? The factor for 12 years at 14% from the present value of an annuity table is 5.660. Show your computations.

Explanation / Answer

Present value of inflow=15000*5.660=84900

Initial outflow= 80000

So, NPV= -80000+84900= 4900

As Npv is positive machine should be accepted.

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