Keltner Enterprises is considering investing in a new packing machine.The new machine will provide annual cash operating inflows of $12,300 for 5 years.The cost of the machine is $42,300 and it can be sold at the end of its 5-year useful life for $6,800.Keltner's required rate of return is 10%.What is the machine's net present value?
A) ($105)
B)$13,211
C)$8,549
D)$15,278

Question

Keltner Enterprises is considering investing in a new packing machine.The new machine will provide annual cash operating inflows of $12,300 for 5 years.The cost of the machine is $42,300 and it can be sold at the end of its 5-year useful life for $6,800.Keltner's required rate of return is 10%.What is the machine's net present value?
A) ($105) 
B)$13,211 
C)$8,549 
D)$15,278

Quizplus · Accepted Answer

To find the net present value (NPV) of the machine, we need to calculate the present value of the cash inflows and outflows. The formula for NPV is:

NPV = Present value of cash inflows - Present value of cash outflows

The cash outflows include the initial cost of the machine and the cost of any potential resale value. The present value of the cash inflows is calculated by discounting each year's cash inflow by the required rate of return.

Year 1: $12,300/(1+0.10)^1 = $11,181
Year 2: $12,300/(1+0.10)^2 = $10,165
Year 3: $12,300/(1+0.10)^3 = $9,236
Year 4: $12,300/(1+0.10)^4 = $8,384
Year 5: $12,300/(1+0.10)^5 = $7,600

Present value of cash inflows = $46,566
Cash outflows = $42,300 - $6,800 = $35,500

NPV = $46,566 - $35,500 = $11,066

Therefore, the best choice is C as it has a positive NPV, indicating that the investment is profitable and should be undertaken.

Keltner Enterprises Is Considering Investing in a New Packing Machine