Question

36 The management of Penfold Corporation is considering the purchase of a machine that would cost...

36

The management of Penfold Corporation is considering the purchase of a machine that would cost $310,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $60,000 per year. The company requires a minimum pretax return of 12% on all investment projects.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.

The net present value of the proposed project is closest to (Ignore income taxes.):

Homework Answers

Answer #1

Solution:

Computation of NPV - Penfold Corporation
Particulars Period Amount PV factor at 12% Present Value
Cash outflows:
Initial investment 0 $310,000.00 1 $310,000
Present Value of Cash outflows (A) $310,000
Cash Inflows
Annual cash inflows 1-6 $60,000.00 4.111 $246,660
Present Value of Cash Inflows (B) $246,660
Net Present Value (NPV) (B-A) -$63,340

Note: As PV factor table not provided in question, i have rounded off PV factor upto 3 decimal places. However actual answer may differ due to rounding off differences.

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