Somerville Corporation is considering investing in specialized equipment costing

Question

Somerville Corporation is considering investing in specialized equipment costing $674,000. The equipment has a useful life of 5 years and a residual value of $56,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are Year 1 Year 2 Year 3 Year 4 Year 5 $110,000 $130,000 $153,000 $87,000 $83,000 $563,000 Somerville Corporation's required rate of retum is 14%. The net present value of the investment is closest to (The present values for this scenario are as follows: Year 1-0.877, Year 2-0.769, Year 3 0.675, Year 4 = 0.592 and Year 5 = 0.519.) OA. O B. OC. OD, $57,609 negative $111,000 positive. $250,640 positive $250,640 negative.

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=(110,000*0.877)+(130000*0.769)+(153000*0.675)+(87000*0.592)+(83000*0.519)+(56000*0.519)

=$423360

NPV=Present value of inflows-Present value of outflows

$423360-$674000

which is equal to

=($250640)(Negative).

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