The management of Arnold Corporation is considering the purchase of a new machin
ID: 2489627 • Letter: T
Question
The management of Arnold Corporation is considering the purchase of a new machine costing $200,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:
Income from Net Cash
Year Operations Flow
1 $50,000 $90,000
2 20,000 60,000
3 10,000 50,000
4 5,000 45,000
5 5,000 45,000
The present value index for this investment is
a. .88.
b. 1.45.
c. 1.14.
d. .70.
The management of Arnold Corporation is considering the purchase of a new machine costing $200,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:
Income from Net Cash
Year Operations Flow
1 $50,000 $90,000
2 20,000 60,000
3 10,000 50,000
4 5,000 45,000
5 5,000 45,000
The present value index for this investment is
a. .88.
b. 1.45.
c. 1.14.
d. .70.
Explanation / Answer
Present Value Index
= NPV of the project / Initial Investment
= $227600 / $ 200000
= 1.138 = 1.14 (approximately)
Answer: C.
Year 1 Income from operation ($) Net cash flow ($) Discount factor @10% PV of cash flow ($) 1 50000 90000 0.909 81810 2 20000 60000 0.826 49560 3 10000 50000 0.751 37550 4 5000 45000 0.683 30735 5 5000 45000 0.621 27945 NPV 227600Related Questions
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