Duncan Company is considering the investment of $138,200 in a new machine. It is
ID: 2381813 • Letter: D
Question
Duncan Company is considering the investment of $138,200 in a new machine. It is estimated that the new machine will generate additional cash flow of $20,500 per year for each year of its 8-year life and will have a salvage value of $13,500 at the end of its life. Duncan's financial managers estimate that the firm's cost of capital is 8%.
Using Table 6-4 and Table 6-5, calculate the net present value of the investment. (Round pv factor to 4 decimal places, intermediate calculations and the final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)
Calculate the present value ratio of the investment. (Round pv factor to 4 decimal places, intermediate calculations to the nearest dollar amount and final answer to 2 decimal places.)
Duncan Company is considering the investment of $138,200 in a new machine. It is estimated that the new machine will generate additional cash flow of $20,500 per year for each year of its 8-year life and will have a salvage value of $13,500 at the end of its life. Duncan's financial managers estimate that the firm's cost of capital is 8%.
Factors for Calculating the Present VaJue of $1 Table 6-4 Table 6-5 Factors for Calculating the Present VaJue of an Annuity of $1Explanation / Answer
1
YEAR
PARTICULARS
AMOUNT
P.V. FACTOR
PRESENT VALUE
0
Investment
-138200
1.0000
-138200.0000
1
Additional Cashflow
20500
0.9259
18981.4815
2
Additional Cashflow
20500
0.8573
17575.4458
3
Additional Cashflow
20500
0.7938
16273.5609
4
Additional Cashflow
20500
0.7350
15068.1120
5
Additional Cashflow
20500
0.6806
13951.9555
6
Additional Cashflow
20500
0.6302
12918.4774
7
Additional Cashflow
20500
0.5835
11961.5531
8
Additional Cashflow
20500
0.5403
11075.5121
8
Residual Value
13500
0.5403
7293.6299
NPV
-13100.2717
2
Present Value Ratio = NPV / PV of cost
= -13100 / 138200 = -0.09479
~ -0.01
3
At IRR, the NPV is 0.
138200 = 20500*[(1+i)-1 + (1+i)-2 +
YEAR
PARTICULARS
AMOUNT
P.V. FACTOR
PRESENT VALUE
0
Investment
-138200
1.0000
-138200.0000
1
Additional Cashflow
20500
0.9259
18981.4815
2
Additional Cashflow
20500
0.8573
17575.4458
3
Additional Cashflow
20500
0.7938
16273.5609
4
Additional Cashflow
20500
0.7350
15068.1120
5
Additional Cashflow
20500
0.6806
13951.9555
6
Additional Cashflow
20500
0.6302
12918.4774
7
Additional Cashflow
20500
0.5835
11961.5531
8
Additional Cashflow
20500
0.5403
11075.5121
8
Residual Value
13500
0.5403
7293.6299
NPV
-13100.2717
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