Pique Corporation is looking to purchase a new machine for $300,000. Management predicts that the...
Question:
Pique Corporation is looking to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments. What is the net present value (NPV) of the investment? (The PV annuity factor for 5 years, 10% is 3.791.) Assume that the cash inflows occur at year-end.
Net Present Value Analysis:
The net present value of a given investment is determined by deducting the initial investment from the sum of present values of all prospective cash flows where the discount factor consists of relevant cost of capital. If the net present value is positive, the project is accepted.
Answer and Explanation: 1
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View this answerThe calculated net present value of the given investment is $63,936.
The depreciation expense for each year is given by:
- = (Initial cost - residual...
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How to Calculate Net Present Value: Definition, Formula & Analysis
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Chapter 5 / Lesson 20
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Learn about what net present value is, how it is calculated both for a lump sum and for a stream of income over multiple years. View some examples on NPV.
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