X Company is planning to drop a department that has shown a loss over the past f
ID: 2463190 • Letter: X
Question
X Company is planning to drop a department that has shown a loss over the past few years. Its accountant estimates that the savings from dropping the department will be $15,600 a year for the next 7 years. The accountant also believes that the company will be able to immediately sell some equipment that was used in the department for $19,000. Assuming a discount rate of 5%, what is the net present value of dropping the department?
My work: 19,000+15,600*5.389-0=$103,068.4 <-- This answer is incorrect, what is the correct answer?
Explanation / Answer
Present value of annual savings = 15,600 x PVAi=5%, n=7 = 15,600 x 5.7864 = $ 90,267.84
Present value of equipment sold = $ 19,000
Therefore present value of total cash inflows = 19,000 + 90,267.84 = $ 109,267.84
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