Click here to view Exhibit 13B-1 http://lectures.mhhe.com/connect/0078111005/Exh
ID: 2383062 • Letter: C
Question
Click here to view Exhibit 13B-1 http://lectures.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-1.jpg
Exhibit 13B-2 - http://lectures.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-2.jpg
to determine the appropriate discount factor(s) using tables.
Minden Company’s required rate of return is 18%. The company can purchase a new machine at a cost of $42,400. The new machine would generate cash inflows of $10,000 per year and have a five-year life with no salvage value. Compute the machine’s net present value. (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Negative amount should be indicated with minus sign. Omit the "$" sign in your response.)
Consider each case below independently. (Ignore income taxes.)Click here to view Exhibit 13B-1 http://lectures.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-1.jpg
Exhibit 13B-2 - http://lectures.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-2.jpg
to determine the appropriate discount factor(s) using tables.
Explanation / Answer
According to the given information,
Required rate of return = 18%
Cost of the new machine = $42,400
Cash inflows = $10,000
Number of years = 5
To calculate the net present value, we have to calculate the present value of annuity for 5yrs at 18%. The present value of annuity for 5yrs at 18% is 3.1272
Present value of cash flows is obtained by multiplying this factor with the cash inflows
Present value of cash flows = 3.1272 * $10,000
= $31,272
Net present value = Present value of cash flows - initial cost
= $31,272 -$42,400
= -$11,128
Therefore, the NPV of the project is negative and the value is -$11,128
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