question 11 easton ltd is considering investing in new piece of machinery for its factory the...

question 11

easton ltd is considering investing in new piece of machinery for its factory the machine costs $340000 and is expected to last 7 years. it estimates that annual cash flows would be $82000 and the equipment would have a salvage value of $13000 the company hurdle rate is 11% what is the net present value of this investment ?(ignore income taxes)

1-$46400

2-$247000

3-$87625

4-$52662

5-$234000

Expert Solution

Ans.	Option 4th $52,662

	Calculations:

	Year	Cash inflow *	P V Factor	Present Value
	1	$82,000	0.900901	$73,874
	2	$82,000	0.811622	$66,553
	3	$82,000	0.731191	$59,958
	4	$82,000	0.658731	$54,016
	5	$82,000	0.593451	$48,663
	6	$82,000	0.534641	$43,841
	7	$82,000	0.481658	$39,496
	7	$13,000	0.481658	$6,262
	Total Present Value Of Cash Inflow			$392,662

	Present value of cash inflows			$392,662
	Less: Investment			-$340,000
	Net present value			$52,662

	*Residual value is cash inflow for the end of useful life.

	*Calculation of Present value factors: (PV @ 11%)

	Year		PV @ 11%
	1	1 / (1 + 0.11)^1	0.900901
	2	1 / (1 + 0.11)^2	0.811622
	3	1 / (1 + 0.11)^3	0.731191
	4	1 / (1 + 0.11)^4	0.658731
	5	1 / (1 + 0.11)^5	0.593451
	6	1 / (1 + 0.11)^6	0.534641
	7	1 / (1 + 0.11)^7	0.481658

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