The Wexler Company is considering the purchase of a new machine costing $250,000

ID: 2476426 • Letter: T

Question

The Wexler Company is considering the purchase of a new machine costing $250,000. This machine is estimated to cost $5,000 per year in operating expenses but it will allow the company to cam an additional $100,000 per year in revenues and at the end of 3 years the machine will have a salvage value of $40,000. If the required rate of return is 12% what is the net present value of this project? (Round the answer to the nearest whole dollar) A) $6,653 B) $(21,820) C) $18,662 D) $33,428 5. A company with $2,000,000 in operating assets is considering purchasing a machine that costs $300,000 and which is expected to reduce operating costs by $60,000 each year. The payback period for this machine in years is closest to: A) 2 years. B) 5 years. C) 6.7 years. D) 15 years.

Explanation / Answer

Net present value

Year 0 purchase price of machine 250,000*1.000 = (250,000)

Year 1-3 Cash flow (100,000- 5000) *2.40183 =228,174

Year 3 Salvage value 40,000*.71178 = 28,471

Net present value = 6,645

Option A

(note slight difference may be due to rounding of discount factor to four values)

For year 1-3 use present value of ordinary annuity table for 3 years where 1=12%

For salvage use present value of $1 table

2)payback period = initial investment/ net annual cash flow

=300,000/60,000

= 5 years

Option B