Question

(Ignore income taxes in this problem.) The following data pertain to an investment proposal:

Cost of the investment	$58,000
Annual cost savings	$16,000
Estimated salvage value	$8,000
Life of the project	5 years
Discount rate	11%

Use Excel or financial calculator to solve.

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

$34,000

$5,880

$1,136

$4,744

Answer 1

Present value factor

= 1 / (1 + r) ^ n

Where,

r = Rate of discounting = 11% or 0.11

n = Years = 0 to 5

So, PV Factor for year 2 will be

= 1 / (1.11) ^ 2

= 1 / 1.2321

= 0.811622

Similarly, other calculations are shown in the following table

Calculations	Particulars
	Years	0	1	2	3	4	5
A	Cost of the investment	-58000	0	0	0	0	0
B	Annual cost savings	0	16000	16000	16000	16000	16000
C	Estimated Salvage Value	0	0	0	0	0	8000
D = A+B+C	Net Cash Flows	-58000	16000	16000	16000	16000	24000
E	Present value factor	1	0.900901	0.811622	0.731191	0.658731	0.593451
F = D x E	Present values	-58000	14414.41	12985.96	11699.06	10539.7	14242.83
G = Sum F	Net Present Value	5882

So, as per above calculations, the Net Present Value is closest to $5,880 and so option B is the correct option