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).