The management of Kinion Corporation is considering the purchase of a machine that would cost $170,000, would last for 4 years, and would have no salvage value. The machine would reduce labor and other costs by $60,000 per year. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes.):See separate Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Determine the net present value of the project.
What will be an ideal response?
| Year | |||||||||
| Now | 1-4 | 4 | |||||||
| Initial investment | $ | (170,000 | ) | ||||||
| Working capital | $ | 0 | $ | 0 | |||||
| Annual net cash flow | $ | 60,000 | |||||||
| Salvage value | $ | 0 | |||||||
| Total cash flows (a) | $ | (170,000 | ) | $ | 60,000 | $ | 0 | ||
| Discount factor (12%) (b) | 1.000 | 3.037 | 0.636 | ||||||
| Present value of cash flows (a) × (b) | $ | (170,000 | ) | $ | 182,220 | $ | 0 | ||
| Net present value | $ | 12,220 | |||||||
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