Urbana Corporation is considering the purchase of a new machine costing $172,000
ID: 2498943 • Letter: U
Question
Urbana Corporation is considering the purchase of a new machine costing $172,000. The machine would generate net cash inflows of $46,428 per year for 5 years. At the end of 5 years, the machine would have no salvage value. Urbana’s cost of capital is 14 percent. Urbana uses straight-line depreciation. The present value factors of annuity of $1.00 for different rates of return are as follows:
Period
12%
14%
16%
18%
4
3.037
2.914
2.798
2.690
5
3.605
3.433
3.274
3.127
6
4.111
3.889
3.685
3.498
The proposal’s net present value is (rounded to the nearest dollar):
A (12,613)
B -0-
C (4,627)
D 152,000
Period
12%
14%
16%
18%
4
3.037
2.914
2.798
2.690
5
3.605
3.433
3.274
3.127
6
4.111
3.889
3.685
3.498
Explanation / Answer
A (12,613) Statement showing Cash flows Particulars Time PVf@14% Amount PV Cash Outflows - 1.00 (172,000.00) (172,000.00) PV of Cash outflows (172,000.00) Net Cash inflows 1-5 3.4330 46,428.00 159,387.32 PV of Cash Inflows 159,387.32 NPV (12,612.68) Note: Since tax rates are not given there would be no tax savings on depreciation
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