The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year Operating Income 1 Net Cash Flow $180,000 120,000 100,000 90,000 120,000 The net present value for this investment is 2 3 4 5 $100,000 40,000 40,000 10,000 10,000
The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year Operating Income 1 Net Cash Flow $180,000 120,000 100,000 90,000 120,000 The net present value for this investment is 2 3 4 5 $100,000 40,000 40,000 10,000 10,000
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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
Transcribed Image Text:### Investment Analysis for Arkansas Corporation
**Overview:**
The management of Arkansas Corporation is evaluating the purchase of a new machine, which costs $490,000. The desired rate of return for the company is set at 10%. To assess the viability of this investment, the present value factors for $1 at a compound interest rate of 10% over a span of 1 to 5 years are provided as follows:
- Year 1: 0.909
- Year 2: 0.826
- Year 3: 0.751
- Year 4: 0.683
- Year 5: 0.621
**Financial Data:**
To aid in determining the acceptability of this investment, the following financial data has been provided:
| Year | Operating Income | Net Cash Flow |
|------|------------------|---------------|
| 1 | $100,000 | $180,000 |
| 2 | $40,000 | $120,000 |
| 3 | $40,000 | $100,000 |
| 4 | $10,000 | $90,000 |
| 5 | $10,000 | $120,000 |
**Analysis:**
The next step is to calculate the net present value (NPV) of this investment. The NPV will provide a clear indication of whether the investment should be undertaken, based on the desired rate of return and the provided financial data.
**Conclusion:**
The net present value for this investment, based on the aforementioned data, needs to be calculated to finalize the decision. This critical value will illustrate the profitability and financial feasibility of the new machine acquisition.
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