(Ignore income taxes in this problem.) Beaver Company is investigating the purch
ID: 2435679 • Letter: #
Question
(Ignore income taxes in this problem.)Beaver Company is investigating the purchase of a new threading machine that costs $18,000. The machine would save about $4,000 per year over the present method of threading component parts, and would have a salvage value of about $3,000 in 6 years when the machine would be replaced. The company's required rate of return is 12%.
The machine's net present value is:
1) $1,556.
2) ($35).
3) $11,000.
4) $8,000.
show work please present value of Annuity is 4.111 if needed
Explanation / Answer
1) $1,556.
2) ($35).
3) $11,000.
4) $8,000.
Yr0 Yr1 Yr2 Yr3 Yr4 Yr5 Yr6
Cost of machine -$18,000
Net savings $4T $4T $4T $4T $4T $4T
Replaced value $3T
__________________________________________________________
Total -$18,000 $4T $4T $4T $4T $4T $7T
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NPV = -$18,000 + (PV of an annuity of $4,000 for 6 years @12%) +
(PV of a sum of $3,000 received in 6 year's time @12%)
NPV = -$18,000 + ($4,000 X 4.1114) + ($3,000 X 0.5066)
= -$18,000 + $16,445.60 + $1,519.80
= -34.60 or ($35)
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