Rooney, Inc. is considering the purchase of a new machine costing $700,000. The
ID: 2722408 • Letter: R
Question
Rooney, Inc. is considering the purchase of a new machine costing $700,000. The machine's useful life is expected to be 9 years with no salvage value. The straight-line depreciation method will be used. The net increase in annual after tax cash flow is expected to be $154,000. Rooney estimates its cost of capital to be 13%. (The present value of a $1 annuity for 9 years at 13% is 5.132, and the present value of $1 to be received in 9 years is 0.333)
The net present value of the investment in the machine under consideration is:
$154,000.
$90,328.
$77,778.
$79,100.
Explanation / Answer
The net present value of the investment in the machine under consideration is $90,328. Statement showing Cash flows Particulars Time PVf@13% Amount PV Cash Outflows - 1.00 (700,000.00) (700,000.00) PV of Cash outflows = PVCO (700,000.00) Cash inflows 1-9 5.1320 154,000.00 790,328.00 Cash inflows (Salvage Value) 9.00 0.3330 - - PV of Cash Inflows =PVCI 790,328.00 NPV= PVCI - PVCO 90,328.00
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