Question

1. The management of Opray Corporation is considering the purchase of a machine that would cost $360,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $78,000 per year. The company requires a minimum pretax return of 11% on all investment projects. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.

The net present value of the proposed project is closest to:

Multiple Choice

• $15,646

• $89,588

• $7,536

• $186,000

2. In a statement of cash flows, which of the following would be classified as an investing activity?

Multiple Choice

• The sale of the company's own common stock for cash.

• The sale of equipment.

• Interest paid to a lender.

• The issuance of bonds payable.

Answer 1

1) Cost of Machine = $360,000

benefit = $78,000

It lass for 7 years

Pre tax return = 11%

Net present value = [$78,000 / (1.11)¹] + [$78,000 / (1.11)²] + [$78,000 / (1.11)³] + [$78,000 / (1.11)⁴] + [$78,000 / (1.11)⁵] + [$78,000 / (1.11)⁶] + [$78,000 / (1.11)⁷] - $260,000

Net present value = $367,551.3 - $360,000

Net present value = $7,551.3

So, The Net present value is closest to $7,536

2) Cash flow from an Investing activity is The sale of an Equipment.

Option '2' is correct