Question

A firm is evaluating the purchase of new machinery that requires an initial investment of $10,000. The cash flows that will result from this investment are presently valued at $11,500. The net present value of the investment is:
A. $0
B. –$1,500
C. $1,500
D. $10,000
E. $11,500

Armstrong Bolts, Inc. is considering the purchase of a new machine that will cost $69.500 with installation. If Armstrong expects the cash inflows to zero in the first year and then $21,500 in the second year, $26,000 in the third year, $23,500 in the fourth year, $18,000 in the fifth year, $12,000 in the sixth year. They can to sell the machine to a salvage dealer for $8,000 at the end of the sixth year. What is the NPV if the cost of capital is 11.5%?
A. more than $8,500
B. more than $6,000 but less than $8.500
C. more than $3,500 but less than $6,000
D. more than $1,000 but

You are considering the purchase of an investment that would pay you $2,000 per year for two years and then $3,000 for three years. If you require a 9.5% rate of return, and the cash flows occur at the end of each year, then how much should you be willing to pay for this investment?
A. more than $10,500
B. more than $9,650 but less than $10.500
C. more than $8,700 but less than $9,650
D. more than $7,850 but less than $8,700
E. less than $7,850

Answer 1

Question – 1;

Answer is option (C) $1,500

Explanation;

Net present value = $11,500 – $10,000

= $1,500

Question – 2;

Answer is option (D) more than $1,000 but less than $3,500

Explanation;

Year	Cash flows	Calculation	Present value
0	($69,500)	$69,500 / (1 + 0.115)^0	($69,500)
1	$0	$0 / (1 + 0.115)^1	$0
2	$21,500	$21,500 / (1 + 0.115)^2	$17,293.73
3	$26,000	$26,000 / (1 + 0.115)^3	$18,756.37
4	$23,500	$23,500 / (1 + 0.115)^4	$15,204.37
5	$18,000	$18,000 / (1 + 0.115)^5	$10,444.75
6	$20,000	$20,000 / (1 + 0.115)^6	$10,408.32
Net present value			$2,607.54

Question – 3;

Answer is option (B). More than $9,650 but less than $10,500

Explanation;

Year	Cash flows	Calculation	Present value
1	$2,000	$2,000 / (1 + 0.095)^1	$1,826.48
2	$2,000	$2,000 / (1 + 0.095)^2	$1,826.48
3	$3,000	$3,000 / (1 + 0.095)^3	$2,284.96
4	$3,000	$3,000 / (1 + 0.095)^4	$2,086.72
5	$3,000	$3,000 / (1 + 0.095)^5	$1,905.68
Total present value			$9,771.86