Phoxco is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes.
The net present value for this investment is:
A) Positive
B) Zero
C) Negative
D) Cannot be determined

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows back to their present value and subtracting the initial investment. Given the 20% required rate of return, the present value of the annual savings of $8,000 over 14 years will be less than the initial investment of $40,000, resulting in a negative NPV. This is because the high discount rate significantly reduces the present value of future cash flows.

Phoxco Is Considering Automating Its Production Line at a Cost