ABC Corporation is considering the purchase of a machine that would cost $180,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $42,000. The company requires a minimum pretax return of 10% on all investment projects. (Ignore income taxes.)
The net present value of the proposed project is closest to:
$(30,000) A
$(9,600) B
$18,520 C
$(24,947) D
Net present value = Present value of cash inflows - Present value of cash outflows
= (Present value of cost savings + Present value of salvage value) - Present value of cash outflows
= [($42,000 * 3.791) + ($18,000 * 0.621)] - $180,000
= ($159,222 + $11,178) - $180,000
= $(9,600)
The answer is B.
ABC Corporation is considering the purchase of a machine that would cost $180,000 and would last...