Royce Company is considering the purchase of some new equipment that will cost t

Question

Royce Company is considering the purchase of some new equipment that will cost the company $180,000. The equipment is estimated to have a 3 year life and no salvage value. The equipment is expected to generate the cash inflows described below over the life of the equipment. Royce's cost of capital is 10%. Cash inflow in Year 1 $110,000 Cash inflow in Year 2 $105,000 Cash inflow in Year 3 $95,000 The NPV of the investment in the equipment is (rounded to nearest dollar): (Points : 1) $338,482; reject proposal because NPV is positive $101,818; accept proposal because NPV is positive $78,147; accept proposal because NPV is positive ($52,908); reject proposal because NPV is negative

Explanation / Answer

Npv of project = pv of inflows - pv of outflows

Net present value  = $ 258065 - 180000

= $78065 approx or nearest to $78147 Npv is positive , and hence option 3 is correct. Proposal should be accepted.

Year pvf @ 10% 2 cash flows $ 3 present value = (2×3) 0 1 (180000) (180000) 1 .909 110000 99990 2 .826 105000 86730 3 .751 95000 71345

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