Question

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

Answer 1

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