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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.):
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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