In: Accounting
X Company has an opportunity to accept a special order that will
result in immediate profit of $51,000. After doing some market
research that cost $5,000, the marketing manager believes that if X
Company accepts the order, the company will lose regular customers.
Specifically, she believes the effect will be lost profits of
$9,500 in each of the next 5 years.
Assuming a discount rate of 6%, what is the net present value of
accepting the special order? [Note: Use the Present Value tables in
the Coursepack.]
A: $5,225 | B: $7,577 | C: $10,986 | D: $15,930 | E: $23,098 | F: $33,492 |
Answer | |||
The correct option is C : $ 10,986 | |||
Explanation | |||
Period | Cash Flows | Discount Factor | Discounted Cash flow |
0 | $ 51,000 | 1 | $ 51,000 |
1 | -$ 9,500 | 0.943 | -$ 8,959 |
2 | -$ 9,500 | 0.89 | -$ 8,455 |
3 | -$ 9,500 | 0.84 | -$ 7,980 |
4 | -$ 9,500 | 0.792 | -$ 7,524 |
5 | -$ 9,500 | 0.747 | -$ 7,097 |
Net Present Value | $ 10,986 | ||