Question & Answer: The management of Opry Company, a wholesale distributor of suntan products, is…..

The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $23,000 machine that would reduce operating costs in its warehouse by $3,600 per year. At the end of the machine’s 8-year useful life, it will have no scrap value. The company’s required rate of return is 10%. (Ignore income taxes.)
Click here to view Exhibit 13B-2, to determine the appropriate discount factor(s) using table.

 

Required:
1. Determine the net present value of the investment in the machine. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the “$” sign in your response.)

 

  Net present value $

Expert Answer

 

Present value of inflows=$3600*Present value of annuity factor(10%,8)

=$3600*5.335

=$19206.

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

=$19206-$23000

=-$3794(Negative NPV).

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