Lopez Co. is interested in purchasing equipment that would improve its operation

Question

Lopez Co. is interested in purchasing equipment that would improve its operational efficiency. The cost of the equipment is $400,000 with an estimated residual value of $30,000 and a useful life of ten years. The equipment is expected to generate cash inflows of $60,000 a year. The company's minimum rate of return is 8 percent. The present value of $1 for ten years at 8 percent is 0.463, and the present value of an annuity of $1 at 8 percent and ten years is 6.710.Using the above information for Lopez, the net present value of the project is

a. $402,600

b.$13,890

c. $200,000

d. $16,490

Explanation / Answer

NPV = Present value of Cash Inflows - Present Value of cash outflows

= $[(60000*6.710) + (30000*.463)] - $400000

= 416490 - $400000

= $16490

Option d is correct

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