Question

In: Accounting

The Management of Arnold Corporation is considering the purchase of a new machine costing $400,000. The...

The Management of Arnold Corporation is considering the purchase of a new machine costing $400,000. The residual value of the machine is estimated to be $0. The company’s desired rate of return is 8%. The estimated income and net cash flows associated with the investment are as follows:

Year

Operating Income

Net Cash Flow

1

$100,000

$180,000

2

   40,000

120,000

3

   20,000

100,000

4

   10,000

    90,000

5

   10,000

    90,000


The payback period for this investment is:

A.

2 years

B.

5 years

C.

none of these

D.

3 years

E.

4 years

The net present value for this investment is:

A.

negative $261,710

B.

positive $261,710

C.

negative $30,850

D.

none of these

E.

positive $30,850

Solutions

Expert Solution

Question 1

Correct answer—(E) 4 years

Year

Net Cash Flow

Cumulative Cash Flow

0

$(4,00,000.00)

$(4,00,000.00)

1

$ 1,80,000.00

$(2,20,000.00)

2

$ 1,20,000.00

$(1,00,000.00)

3

$ 1,00,000.00

$               -  

Question 2

Correct answer----(D) None of these

Correct NPV is $76356

Year

Annual Cash Flow

NPV Factor at 8% Discount rate

Discounted Cash Flow

1

$ 1,80,000.00

0.9259

$    1,66,667

2

$ 1,20,000.00

0.8573

$    1,02,881

3

$ 1,00,000.00

0.7938

$        79,383

4

$      90,000.00

0.7350

$        66,153

5

$      90,000.00

0.6806

$        61,252

Present value of Cash Inflows

$    4,76,336

Less: Initial Investment

$ -400000

Net Present value

$       76,336


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