MC Qu. 119 Clairmont Corporation is considering the purchase ... Clairmont Corpo
ID: 333825 • Letter: M
Question
MC Qu. 119 Clairmont Corporation is considering the purchase ...
Clairmont Corporation is considering the purchase of a machine that would cost $180,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $25,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $31,000. The company requires a minimum pretax return of 8% on all investment projects. (Ignore income taxes in this problem.)
The net present value of the proposed project is closest to: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)
$(4,039)
$12,959
$37,000
$(19,386)
Clairmont Corporation is considering the purchase of a machine that would cost $180,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $25,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $31,000. The company requires a minimum pretax return of 8% on all investment projects. (Ignore income taxes in this problem.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.The net present value of the proposed project is closest to: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)
Explanation / Answer
solution-
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=31000/1.08+31000/1.08^2+.............+31000/1.08^7+25000/1.08^7
=31000[1/1.08+1/1.08^2+...........+1/1.08^7]+25000/1.08^7
=31000*5.206+25000*0.583
=$175961
NPV=Present value of inflows-Present value of outflows
=$175961-$180,000
($4039)(A)(Negative)(Approx).
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