Question

Concose Park Department is considering a new capital investment. The cost of the machine is $280,000. The annual cost savings if the new machine is acquired will be $165,000. The machine will have a 3-year life and the terminal disposal value is expected to be $35,000. There are no tax consequences related to this decision.
Required:
1. If Concose Park Department has a required rate of return of 14%, which of the following is closest to the present value of the project?
A) $190,880
B) $87,750
C) $126,755
D) $103,130

Answer 1

Answer:

C) $126,755

Explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.

Present value can be calculated using a financial calculator:

Cash flow in year 0 = $-280,000. 

Cash flow each year in year 1 and 2 = $165,000

Cash flow in year 3 = $165,000 + $35,000 = $200,000

I = 14%

NPV = $126,693.29

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you