[The following information applies to the questions displayed below.] Helicopter

Question

[The following information applies to the questions displayed below.]

Helicopter Gear is planning to expand its product line, which requires investment of $547,400 in special-purpose machinery. The machinery has a useful life of seven years and no salvage value. The estimated annual results of offering the new products are as follows:

All revenue from the new products and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.rev: 08_09_2012

Compute the net present value of this proposed investment, using a discount rate of 15%. (An annuity table shows that the present value of $1 received annually for seven years, discounted at 15%, is 4.160.)

Multiple Choice

$103,600

Revenue $ 523,000 Expenses (Including straight-line depreciation) (497,600 ) Increase in net income $ 25,400

Explanation / Answer

Annual depreciation = 547400/7= $78200 Net annual cash flows = 523000-(497600-78200)= $103600 Net present value of this proposed investment = (103600*4.16)-547400= ($116424) Option 3 is correct

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