The management of Douglass Corporation is considering the purchase of a new mach

Question

The management of Douglass Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

Year Income from operations Net cash flow
1 $18,750 $93,750
2 $18,750 $93,750
3 $18,750 $93,750
4 $18,750 $93,750
5 $18,750 $93,750

The present value index for this investment is:

a) 1.0

b) .95

c) 1.25

d) 1.05

Explanation / Answer

The present value of Annuity of $93,750 = 93,750 x 4.212 = 394875 Present value index = 394875 / 375000 = 1.05 Answer - The present value index for this investment is: d) 1.05

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