Question

The owners of the Nona Brick Oven are considering an investment in a conveyor oven costing $10,493. The oven is expected to last for 15 years and would need an upgrade costing $3,500 in year 7. The owners assumed that items baked in the oven would add $350 per month in additional net cash flows. Calculate the net present value of the investment using a target rate of return of 10%.

• $32,570.10

• $1,743.10

• $20,334.00

• $30,827.00

Answer 1

C.$20,334.00

let us know the present value of upgrade cost year 7:

$3500 * 1 /(1+r)^n

=> r = 10% * 1/12

=>0.83333%

=>0.008333

r = 7 years * 12 =>84 months.

=>$3500* 1/(1.008333)^84

=>3500*0.4980416

=>$1743.1456.

present value of cash out flows will be = $10,493 + 1743.1456

=>$12,236.1456.

present value of cash inflows = A*[1- (1+r)^(-n)]/r

here,

A = 350

r=10% *1/12

=>0.83333%

=>0.008333

n=15 years*12

=>180 months.

=>350*[1-(1.008333)^(-180)]/0.008333

=>93.0595584

present value of inflows = 350*93.0595584

=>$32,570.84544.

net present value = 32,570.84544-12,236.1456

=>$20,334.70.