Purchase Solution

ABC Company: net present value of the investment?

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ABC Company is considering the purchase of a new machine for \$76,000. The machine would generate a net cash inflow of \$23,214 per year for 5 years. At the end of 5 years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciations. The present value factors of annuity of \$1.00 for different rates of return are as follows:
Year 12% 14% 16% 18%
4 3.037 2.914 2.798 2.690
5 3.605 3.433 3.274 3.127
6 4.111 3.889 3.685 3.498

What is the net present value of the investment?

a) \$6,987.70
b) \$6,098.77
c) \$10,691.18
d) \$7,686.47

Solution Summary

This solution provides steps to determine the net present value of an investment.

Solution Preview

First you figure the PV of the annuity, P = 5, i = 12%:

\$23,214 x factor 3.605 = ...

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