Turntec is considering replacing an automatic shuttle machine that has a book value of $2,000 and a $0 market value with a more efficient machine that will cost $24,000. The annual net cash flows from the new equipment are expected to be $6,000 for the next 6 years. What is the net present value of this project? Assume the firm's cost of capital is 12% and its marginal tax rate is 40%.
A) $666
B) $1,466
C) $1,866
D) -$134

Question

Quizplus · Accepted Answer

The net present value (NPV) of the project is $1,466. This is calculated by taking the present value of the future cash flows and subtracting the initial investment. The present value of the future cash flows is calculated by multiplying each cash flow by the present value factor, which is the present value of $1 received at the end of each year. The present value factor is calculated using the formula PV = 1 / (1 + r)^n, where r is the discount rate and n is the number of years. In this case, the discount rate is 12% and the number of years is 6. The present value of the future cash flows is $25,466. The initial investment is $24,000. Therefore, the NPV is $1,466.

Turntec Is Considering Replacing an Automatic Shuttle Machine That Has