40. Clairmont Corporation is considering the purchase of a machine that would co

Question

40. Clairmont Corporation is considering the purchase of a machine that would cost $130,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $19,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $33,000. The company requires a minimum pretax return of 13% on all investment projects. (Ignore income taxes in this problem.) Click here to view Exhibit 11B-1 and Exhibit 113-2, to determine the appropriate discount factor(s) using tables. The net present value of the proposed project is closest to: (Round discount factorfs) to 3 decimal places, intermediate and final answers to the nearest dollar amount.) $(3,622) O $12,542 $35,000 O $(18.969)

Explanation / Answer

$ (3,622)

Working:

a. Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.13)^-5)/0.13 i 13% = 3.517 n 5 b. Present Value of 1 = (1+i)^-n Where, = (1+0.13)^-5 i 13% = 0.543 n 5 c. Present Value of annual Saving $       33,000 x         3.517 = $       1,16,061 Present Value of Salvage $       19,000 x         0.543 = $           10,317 Total Present Value of Cash inflows $       1,26,378 Less:Cost of Project $       1,30,000 Net Present Value $           -3,622

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