question archive Concose Park Department is considering a new capital investment
Concose Park Department is considering a new capital investment
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Concose Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $260,000. The annual cost savings if the new machine is acquired will be $95,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be $35,000. Concose Park Department is assuming no tax consequences. If Concose Park Department has a required rate of return of 14%, which of the following is closest to the present value of the project?
a. $66,135
b. $84,300
c. $31,140
d. $97,275
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Answer:
The present value is closest to b. 84,300 as shown below:
Step-by-step explanation
The present value of the project can be determined using the formula; ΣPV=ΣC/(1+r)n;
where C-future cash flow or savings=$95,000, with final year having terminal value of Cterminal =$35,000,
r=rate=14%,
n=5 years
ΣPV=-260,000+Σ95,000/ 1.14 +95000/ 1.2996 +95000/ 1.481544 +95000/ 1.68896 + 95000/1.925415 +35,000/ 1.925415
=-260,000+ 326142.7 + 18177.9 = $84320.6
