Use the information below to answer the following question(s).
Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below:
Note: Other than the initial investment, cash flows are end of period.
-The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $350,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end of the four-year period. What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered.
A) $119,550; yes
B) $69,550; no
C) $1,019,550; yes
D) $326,750; no
E) $500,000; yes

Question

Use the information below to answer the following question(s).
Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below:
  Note: Other than the initial investment, cash flows are end of period.
-The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $350,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end of the four-year period. What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered.
A) $119,550; yes 
B) $69,550; no 
C) $1,019,550; yes 
D) $326,750; no 
E) $500,000; yes

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount the cash flows by the required rate of return (14%). 
NPV = -950,000 + (350,000/1.14) + (350,000/1.14^2) + (350,000/1.14^3) + (350,000/1.14^4) + 50,000
NPV = $119,550
Since the NPV is positive, the investment is expected to generate more cash than the required rate of return, so the company should purchase the new machine.

Use the Information Below to Answer the Following Question(s)