The management of Urbine Corporation is considering the purchase of a machine th

Question

The management of Urbine Corporation is considering the purchase of a machine that would cost $320,000 would last for 5 years, and would have no salvage value. The machine would reduce labor and other costs by $76,000 per year. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes in this problem.) The net present value of the proposed project is closest to: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

$23,340

$68,700

$6,020

$46,020

Explanation / Answer

NPV = sum of all present value. Present value = amount of cash flow/(1+rate of return)^year in which cash flow happens

Now, there is an annual savings of 76,000. This can be treated as an annuity. We will have to find the present value of this annuity for n = 5 and r = 12%.

Present value interest factor of annuity (PVIFA) (12%,5 years) = 3.605 (from the PVIFA table).

Thus present value of all savings of labor and other costs = annual amount*PVIFA = 76,000*3.605 = 273,980

PV of initial investment = -320,000 (as the time point is 0)

NPV = -320,000 + 273,980 = - 46,020

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