(TCO 8) Bozo Brothers purchased a machine that will be depreciated on the straig
ID: 2473353 • Letter: #
Question
(TCO 8) Bozo Brothers purchased a machine that will be depreciated on the straight-line basis over an estimated useful life of 7 years with no salvage value. The machine is expected to generate cash flow, net of taxes, of $80,000 in each of the next 7 years. Bozo’s expected rate of return is 12%. Information on present value factors is as follows. Present value of $1 at 12% for seven periods 0.452 Present value of an ordinary annuity of $1 at 125 for seven periods 4.564 Assuming a positive net present value of $12,720, what was the original cost of the machine? (Points : 11)
A: $240,400
B: $253,120
C: $352,400
D: $377,840
Explanation / Answer
The correct option is D. $ 377,840
Net present value = Present value of cash inflows - Initial investment
Present value of cash inflows at discount rate of 12% = After-tax annual cash flows x 4.564 = 80,000 x 4.564 = $ 365,120
Initial investment = Present value of cash inflows + Net present value = $ 365,120 + $ 12,720 = $ 377,840
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