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The management of Opray Corporation is considering the purchase of a machine that would cost $360,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $78,000 per year. The company requires a minimum pretax return of 11% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided. The net present value of the proposed project is closest to: Multiple Choice $15,646 $89,588 $7,536 $186,000

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Answer:

$7,536

Explanation:

As we know Net Present value is calculated by discounting each years cash flows using using the required rate of return.

Saving in labor and other costs per year = $78,000

Initial Investment = $360,000

Numbers of years = 7 years

Required rate of return = 11%

As the saving are constant each year, so we will use the present value of annuity formula to calculate the present value of the cost savings.

Present value of cost saving = $78,000 x ( 1 - ( 1 + 11% )^-7 ) / 11% = $78,000 x 4.712 = $367,536

Net Present Value = Present value of cost saving - initial Investment

Net Present Value = $367,536 + $360,000 = $7,536