Larson Corporation is considering an investment in a machine. The machine will cost $180,000, will last 10 years, and will have a $30,000 salvage value at the end of 10 years. The machine is expected to generate net cash inflows of $40,000 per year in each of the 10 years. Frick's discount rate is 10%. What is the net present value of the project?

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andromache andromache · Answer 1 · 2019-12-16T12:14:05+01:00

Answer:

$77,362

Explanation:

The computation of the net present value is shown below:

= Present value of all yearly cash inflows and salvage value after applying discount factor - initial investment

where,

Initial investment is $180,000

And, the present value would be

= Annual cash flows × PVIFA factor for 10 years at 10%

= $40,000 × 6.145

= $245,800

And for salvage value it would be

= $30,000 × 0.3854

= $11,562

The discount rate would be

= 1 ÷ (1 + rate) ^ years

where,

rate is 10%

Year = 0,1,2,3,4 and so on

Discount Factor:

For Year 10 = 1 ÷ 1.10^10 = 0.3854

Since the annual cash flows are same for the ten years so we use the PVIFA table

Refer to the PVIFA table

Now put these values to the above formula

So, the value would be equal to

= $245,800 + $11,562 - $180,000

= $77,362