X Company is planning to drop a department that has shown a $10,000 loss in each
ID: 2574201 • Letter: X
Question
X Company is planning to drop a department that has shown a $10,000 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 $20,000, 3) sales of another product will be increased, contributing $1,000 to annual profits. Assuming a 6 year time horizon and a discount rate of 5%, what is the net present value of dropping the department?
(Just in case you need these tables)
Present Value of $1.00
Present Value of an Annuity 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 0.901 0.893 2 0.943 0.925 0.907 0.890 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 0.747 0.713 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 0.564 0.535 0.507 7 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 8 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404Explanation / Answer
Net present value of dropping the department = 10000+(20000+1000)*5.076= 116596
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