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Question: X Company is planning to drop a department that has shown a $12,000 loss in each of the last 3 ye...

X Company is planning to drop a department that has shown a $12,000 loss in each of the last 3 years. If the department is dropped, three things will happen: 1) the annual loss will be avoided, 2) some equipment will be sold immediately for $11,000, 3) sales of another product will be increased, contributing $1,000 to annual profits. Assuming a 6 year time horizon and a discount rate of 4%, what is the net present value of dropping the department?   

Explanation / Answer

discounting rate = 4% years =6years

Sum of all benefits:

NPV of dropping the department = $11000 + $13000*PVIFA(4%,6years) =$11000 + $13000*5.7692

= $86,000 (Decimals rounded off)

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