The management of Urbine Corporation is considering the purchase of a machine th
ID: 2473331 • Letter: T
Question
The management of Urbine Corporation is considering the purchase of a machine that would cost $300,000 would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $60,000 per year. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes in this problem.) Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables. The net present value of the proposed project is closest to: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)
$26,976
$53,340
$1,340
$79,704
Explanation / Answer
Answer:
The net present value of the proposed project is closest to: -$53,340
Calculation of Net Present Value
1) Present Value of Cash Outflow = Cost of Machine at year 0 = $300,000
2) Present Value of Cash Inflow
Annual Net Saving in labor and other costs = $60,000
Present Value of Annual Saving in labor and other costs = $60,000 x PVIFA (12%, 6)
=$60,000 x 4.111
= $246,660
Net Present Value = Present Value of Cash Inflow - Present Value of Cash Outflow
NPV = $246,660 - $300,000 = -$53,340
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.