Braxton Manufacturing is considering the purchase of new computerized equipment.The machine costs $85,000 and would generate $22,000 in annual cost savings over its 5-year life.At the end of 5 years, the equipment would have a $5,000 salvage value.Braxton's required rate of return is 12%.Using the interest tables, the machine's net present value is nearest
A)($2,857).
B)($5,694).
C)$79,306.
D)$110,000.

Question

Quizplus · Accepted Answer

The net present value (NPV) of an investment is calculated by discounting the future cash flows (both inflows and outflows) back to their present value using the required rate of return, and then summing those present values. In this case, the cash inflows are the annual cost savings of $22,000 for 5 years and the salvage value of $5,000 at the end of year 5. Using the 12% discount rate, we calculate the present value of these cash flows and subtract the initial investment of $85,000. The closest answer provided is ($2,857), indicating a slightly negative NPV, suggesting that the investment would slightly underperform the required rate of return.

Braxton Manufacturing Is Considering the Purchase of New Computerized Equipment