Exercise 10-5B Determining the net present value Jessica Larkin, manager of the

Question

Exercise 10-5B Determining the net present value Jessica Larkin, manager of the Nash Music Hall, is considering the opportunity to expand the compa- ny's concession revenues. Specifically, she is considering whether to install a popcorn machine. Based on market research, she believes that the machine could produce incremental cash inflows of S6,400 per year. The purchase price of the machine is $17,000. It is expected to have a useful life of three years and a $5,000 salvage value. Ms. Larkin has established a desired rate of return of 16 percent. Required a. Calculate the net present value of the investment opportunity b. Should the company buy the popcorn machine?

Explanation / Answer

Year Amount PV factor Present value Investment Now -17000 1 -17000 Annual cash flows 1-3 6400 2.246 14374 Salvage value 3 5000 0.641 3205 Net present value 579 B Yes, the popcorn machine should be bought

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