the zone company is considering the purchase of a new machine at cost of 1040,00
ID: 2431500 • Letter: T
Question
the zone company is considering the purchase of a new machine at cost of 1040,000 the machine
The Zone Company is considering the purchase of a new machine at a cost of S The machine is expected to improve productivity and thereby increase cash in $250,000 per year for 7 years. It will have no salvage value. The company requires minimum rate of return of 12 percent on this type of capital investment. (Ignore inco for this problem.) Required: 1. Determine the net present value (NPV) of the investment proposal.(The PV annuity for 12%, 7 years is 4.564.) 2. What is the estimated payback period for the proposed investment, under the assumpti that cash inflows occur evenly throughout the year? Round your answer to 2 decimal placeExplanation / Answer
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$250,000*4.564
=$1141000
NPV=Present value of inflows-Present value of outflows
=$1141000-$1040000
=$101000.
2.Payback period=Initial investment/Annual cash flows
=(1040000/250000)
=4.16 years
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