Assume that a company is considering purchasing a machine for $50,000 that will have a five year useful life and a $5,000 salvage value. The machine will lower operating costs by $16,500 per year. The company's required rate of return is 17%. The net present value of this investment is closest to
Assume that a company is considering purchasing a machine for $50,000 that will have a five year useful life and a $5,000 salvage value. The machine will lower operating costs by $16,500 per year. The company's required rate of return is 17%. The net present value of this investment is closest to
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Assume that a company is considering purchasing a machine for $50,000 that will have a five year useful life and a $5,000 salvage value. The machine will lower operating costs by $16,500 per year. The company's required
Expert Solution
Step 1 Net Present Value
| Year | 1 | 2 | 3 | 4 | 5 |
| Savings in operating cost | 16,500.00 | 16,500.00 | 16,500.00 | 16,500.00 | 16,500.00 |
| Salvage Value | - | - | - | - | 5,000.00 |
| Present value @ 17% | 0.8547 | 0.7305 | 0.6244 | 0.5337 | 0.4561 |
| Present value | 14102.5641 | 12053.474 | 10302.114 | 8805.2258 | 9806.3898 |
| Total of Present value | $55,069.77 | ||||
| Initial Investment | $50,000.00 | ||||
| Net present value | $ 5,069.77 |
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