Question

(Ignore income taxes in this problem.) Riveros, Inc., is considering the purchase of a machine that would cost $122,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $30,000. The machine would reduce labor and other costs by $25,200 per year. Additional working capital of $9,200 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 18% on all investment projects. The net present value of the proposed project is closest to:

Click here to view Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using tables.

a. ($25,987)

b. ($38,861)

c. ($10,766)

d. ($18,007)

Answer 1

Answer-The net present value of the proposed project is closest to= $(18007).

Explanation-

RIVEROS INC.
Net Present Value
Particulars	Cash Flows	Present Value Factor @18%	Present value
	(a)	(b)	(c=a*b)
Annual saving in labor and other costs	25200	4.0780	102766
Cost of new Equipment	-122000	1	-122000
Working Capital	-9200	1	-9200
Salvage value (8th year)	30000	0.266	7980
ADD:- Working capital	9200	0.266	2447
Net Present Value			-18007