UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales minus cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow):
$\begin{array}{|l|r|}
\hline \text { Year } 1-10 & \$ 90,000 \
\hline \text { Year } 11 & (\$ 20,000) \
\hline \text { Year } 12 & \$ 100,000 \
\hline
\end{array}$
In addition to the above net operating cash flows, UR Company would purchase production equipment costing $\$ 200,000$ now to use in the rebuilding of the alternators. The equipment would have a 12 -year life and a $\$ 15,000$ salvage value. The company's discount rate is $10 \%$. (Ignore income taxes in this problem.)
- What is the net present value of ALL cash flows associated with this investment,rounded to the nearest dollar? (Do not round your intermediate calculations.)
A) $362,950.
B) $377,864.
C) $382,644.
D) $391,884.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting all cash flows to their present value and summing them up. The initial investment is $200,000. The cash flows for years 1-10 are $90,000 each, year 11 is -$20,000, and year 12 is $100,000 plus the salvage value of $15,000. Using a discount rate of 10%, the NPV is calculated as $382,644.

UR Company Is Considering Rebuilding and Selling Used Alternators for Automobiles