Fossa Road Paving Corporation is considering an investment in a curb-forming machine. The machine will cost $240,000, will last 10 years, and will have a $40,000 salvage value at the end of 10 years. The machine is expected to generate net cash inflows of $60,000 per year in each of the 10 years. Fossa's discount rate is 18%. The net present value of the proposed investment is closest to (Ignore income taxes.) :Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

A) $5,840
B) $37,280
C) $(48,780)
D) $69,640

Question

SADIE BROWN · Accepted Answer

Final Answer : B, Explanation :  The net present value (NPV) of the investment can be calculated as follows:NPV = Present value of cash inflows - Present value of initial investmentUsing Exhibit 14B-1, the discount factor for 10 years at 18% is 0.20611.The present value of the cash inflows for each year can be calculated as:PV of cash inflows = Cash inflow for the year x Discount factorYear 1: $60,000 x 0.20611 = $12,366.60Year 2: $60,000 x 0.20611 = $12,366.60Year 3: $60,000 x 0.20611 = $12,366.60Year 4: $60,000 x 0.20611 = $12,366.60Year 5: $60,000 x 0.20611 = $12,366.60Year 6: $60,000 x 0.20611 = $12,366.60Year 7: $60,000 x 0.20611 = $12,366.60Year 8: $60,000 x 0.20611 = $12,366.60Year 9: $60,000 x 0.20611 = $12,366.60Year 10: $60,000 x 0.20611 = $12,366.60Using Exhibit 14B-2, the present value of $1 for 10 years at 18% is 0.20611.The present value of the initial investment can be calculated as:PV of initial investment = -$240,000 x 0.20611 = -$49,466.40Therefore, the NPV of the investment is:NPV = $12,366.60 x 10 - $49,466.40 + $40,000NPV = $37,280The NPV of the investment is positive, which means that the investment is expected to generate a return higher than the discount rate. Therefore, Fossa Road Paving Corporation should invest in the curb-forming machine.

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