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Net Present Value of Investment: Zeron Example

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The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $400,000 in annual cash flows for a period of four years. The required rate of return is 12%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end of the four-year period. What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered.

A $119,550; yes
B $314,800; yes
C $1,019,550; yes
D $69,550; no

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Solution Preview

B $314,800; yes
NPV = PV of cash flows - initial investment
Initial investment = cost ...

Solution Summary

Solution provides steps necessary to calculate the net present value of an investment.