Question

Simone Company is considering the purchase of a new machine costing $50,000. It is expected to save $9,000 cash per year for 10 years, has an estimated useful life of 10 years, and no salvage value. Management will not make any investment unless at least an 18% rate of return can be earned. Using the net present value method, determine if the proposal is acceptable. Assume all tax effects are included in these numbers.

Answer 1

Answer:

At the rate of return of 18%, the purchase of the new machine is not convenient.

Explanation:

Giving the following information:

Simone Company is considering the purchase of a new machine costing $50,000. It is expected to save $9,000 cash per year for 10 years, has an estimated useful life of 10 years, and no salvage value. Management will not make any investment unless at least an 18% rate of return can be earned.

We need to find the net present value using the following formula:

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

NPV= -50,000 + 9,000/1.18 + 9,000/1.18^2 + 9,000/1.18^3 + ... + 9,000/1.18^10

NPV= -9,553

At the rate of return of 18%, the purchase of the new machine is not convenient. It will produce a loss in value.