(Ignore income taxes in this problem.) The management of Melchiori Corporation i
ID: 2494047 • Letter: #
Question
(Ignore income taxes in this problem.) The management of Melchiori Corporation is considering the purchase of a machine that would cost $320,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $112,000 per year. The company requires a minimum pretax return of 13% on all investment projects. Click here to view Exhibit 8B-2, to determine the appropriate discount factor(s) using tables. The present value of the annual cost savings of $112,000 is closest to: (Round your final answer to the nearest dollar amount.)
Explanation / Answer
Determination of the net present value is as follows:
Particulars
Amount($)
Amount($)
Annual cost savings
112,000
Add:
Depreciation
320,000/7
45,714
Cash flows for the year
157,714
PVAF factor @13% for 7 years
4.4226
Present value of cash flows
697,506
Initial investment
-320,000
Net present value
377,506
Since, the NPV is positive; the project can be taken up.
Particulars
Amount($)
Amount($)
Annual cost savings
112,000
Add:
Depreciation
320,000/7
45,714
Cash flows for the year
157,714
PVAF factor @13% for 7 years
4.4226
Present value of cash flows
697,506
Initial investment
-320,000
Net present value
377,506
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