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 $310,000 would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $60,000 per year. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes in this problem.)

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

The net present value of the proposed project is closest to:

A) $63,340

B) $8,340

C) $35,455

D) $91,225

Explanation / Answer

Net present value is closest to -63340

Particulars Year Cash Flows PVF @ 12% PV Cash Outflow 0 -310000 1 -310000 Savings in cost 1 60000             0.89              53,571.43 Savings in cost 2 60000             0.80              47,831.63 Savings in cost 3 60000             0.71              42,706.81 Savings in cost 4 60000             0.64              38,131.08 Savings in cost 5 60000             0.57              34,045.61 Savings in cost 6 60000             0.51              30,397.87 Net Present Value            (63,315.56)

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