X Company is planning to drop a department that has shown a $8,000 loss in each

Question

X Company is planning to drop a department that has shown a $8,000 loss in each of the last 3 years. If the department is dropped, three things will happen: 1) the annual loss will be avoided, 2) some equipment will be sold immediately for $13,000, 3) sales of another product will be increased, contributing $1,000 to annual profits. Assuming a 7 year time horizon and a discount rate of 596, what is the net present value of dropping the department? Tries 0/5 Submit Answer (Ctrl- Present Value of $1.00 Period 3% 4% | 5% | 6% | 7% | 8% | 9% | 10% | 11% | 12% 1 0.971 0.962 0.952 0.943 0.935 | 0.926 | 0.917 0.909 10.901 10.893 2 0.943 0.925 0.507 0.390 0.873 0.857 0.842 0.826 0.812 0.797 3 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 4 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 5 | 0.863 0.822 0.784 10.747 10.713 0.681 | 0.650 | 0.621 | 0.593 | 0.567 6 0.837 0.790 0.746 0.705 0.666 0.630 0.596 064 0.535 0.507 7 0.813 0.760 0.711 0.665 0.623 0.83 0.547 0.513 0482 0.452 0.789 | 0.731 0.677 .627 0.582 | 0.540 | 0.5 2 10.4670.434 [0.404 - Present Value of an Annuity of $1.00 period: 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 1 | 0.971 .962 | 0.952.0.943| 0.935 | 0.926 | 0.917 | 0.909 | 0.901 | 0.893 2 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 3 2.829 | 2.775 | 2.723 | 2.673 | 2.624 | 2.577|2531| 2.487 | 2.444|2.402 4 . 3.717.13.630| 3.546 | 3.465| 3.387 | 3.312| 3.240 | 3.170 | 3.102 | 3.037| 5 4.580 4.452 4.329 4.212 4.1003.993 3.890 3.791 3.696 3.605 6 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 7 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 7.020 6.733 6463 6.210 5.971 5.747 5.535 5.335s 3.146 4.968

Explanation / Answer

Net present Value of dropping the department will be:

Note: loss will not incur so no extra cost will be incurred in the coming years.

Dropping department Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Equipment sold $13,000 $13,000 Increase in profits 1,000 1,000 1,000 1,000 1,000 1,000 1,000 $7,000 Net cash flow (a) $13,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $20,000 Life 7 years Rate of Return is 5% Present Value factor (b) 1 0.952 0.907 0.864 0.823 0.784 0.746 0.711 Present Value of Net Cash flow (a*b) 13,000.00 952.38 907.03 863.84 822.70 783.53 746.22 710.68 18,786.37

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