Answered: The net present value of the proposed…

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Finance

The net present value of the proposed investment

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 5BE

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question


Cost of the investment	$	52,000
Annual cost savings	$	16,000
Estimated salvage value	$	8,000
Life of the project		5	years
Discount rate		13	%

The net present value of the proposed investment is closest to: (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Multiple Choice

$8,616
$4,272
$4,344
$28,000

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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