The Zeron Corporation wants to purchase a new machine for its factory operations

Question

The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000.  The investment is expected to generate $350,000 in annual cash flows for a period of four years.  The required rate of return is 14%.  The old machine can be sold for $50,000.  The machine is expected to have zero value at the end of the four-year period.  What is the net present value of the investment? Would the company want to purchase the new machine?  Income taxes are not considered. (Points : 3)                                           

$119,550; Yes
   $326,750; No
                                        $1,019,550; Yes
                                        $69,550; No

Explanation / Answer

answer is $119,550; Yes

Year 0 =             ($50,000 - $950,000) =          $(900,000)

         Year 1 =    $350,000 x 0.877 =                   306,950

         Year 2 =    $350,000 x 0.769 =                   269,150

         Year 3 =    $350,000 x 0.675 =                   236,250

         Year 4 =    $350,000 x 0.592 =                   207,200

                                                                $ 119,550

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