Question

The Fox Company is trying to decide whether to invest in automated production equipment as they are currently operating via manual labor. The following relates to the proposed investment to automate: $500,000 initial cost of the equipment, life of the project 5 years, estimated salvage value at the end of 5 years is $60,000, annual cash revenues $170,000 (received each year), annual cash expenses $40,000 (paid each year). At the end of year three, the company will have to pay $50,000 for an engine replacement. The discount rate is 10%.

What is the present value of the initial $500,000 investment in the equipment?

Group of answer choices

$500,000

($500,000)

($400,000)

$250,000

What is the present value of the $170,000 cash revenues received annually (received each year)?

Group of answer choices

$850,000

$650,000

$644,470

$492,830

What is the present value of the $50,000 payment in year 3 to replace the engine?

Group of answer choices

($50,000)

($37,550)

($37,260)

($12,450)

What is the present value of the $40,000 cash expenses paid annually (paid each year)?

Group of answer choices

($151,640)

($124,200)

($200,000)

($40,000)

What is the net present value of the investment?

Group of answer choices

($13,670)

$0

($7,460)

$44,120

Based on the net present value...

Group of answer choices

The rate of return for the investment is less than 10%.

The Fox Company should purchase the equipment

The rate of return for the investment is greater than 10%

The rate of return for the investment is equal to the discount rate

Answer 1