Concose Park Department is considering a new capital investment. The following i
ID: 2417970 • Letter: C
Question
Concose Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $330,000. The annual cost savings if the new machine is acquired will be $85,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be $32,000. Concose Park Department is assuming no tax consequences. If Concose Park Department has a required rate of return of 11%, which of the following is closest to the present value of the project? A) $8,245 B) $24,836 C) $3,136 D) $15,840
Explanation / Answer
Option C is correct.
intial outflow at time 0 is $330000
yearly cost saving is 85000 for 5 years
disposal value at the end of 5 year is $32000
Present value of yearly saving @ 11% for 5 year is 85000*present value factor annuity @11% for 5year
= 85000*3.6959 = $314148
present value of disposal value is 32000*pvf(11%,5) = 32000*.5935
= $18988
NPV = 314148+18988-330000
= 3136
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