(Ignore income taxes in this problem.) Gull Inc. is considering the acquisition

Question

(Ignore income taxes in this problem.) Gull Inc. is considering the acquisition of equipment that costs $430,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are: Incremental net cash flows Year 1 $145,000 Year 2 $195,000 Year 3 $156,000 Year 4 $165,000 Year 5 $155,000 Year 6 $135,000 Click here to view Exhibit 8B-1 to determine the appropriate discount factor(s) using tables. If the discount rate is 20%, the net present value of the investment is closest to:

Explanation / Answer

Correct option (B).

Calculated as follows: (The slight difference is due to rounding off).

Year Incremental net cash flow ($) Discount factor @20% Discounted incremental net cash flow ($) (A) (B) (A) x (B) 0 -4,30,000 1.0000 -4,30,000 1 1,45,000 0.8333 1,20,833 2 1,95,000 0.6944 1,35,417 3 1,56,000 0.5787 90,278 4 1,65,000 0.4823 79,572 5 1,55,000 0.4019 62,291 6 1,35,000 0.3349 45,211 NPV ($) = 1,03,602

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