Almendarez Corporation is considering the purchase of a machine that would cost $190,000 and would last for 10 years. At the end of 10 years, the machine would have a salvage value of $16,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $32,000. The company requires a minimum pretax return of 13% on all investment projects. (lgnore income taxes.) Click here to view Exhibit 12B-1 and Exhibi:128-2, to determine the appropriate discount factoris) using the tables provided. The net present value of the proposed project is closest to: (Round your intermediate calculations and final answer to the nearest whole dollar: amount.) Mustiple Choice $(5)648) 120,568 $30000 5(20,995)
The Correct Answer and Explanation is :
To calculate the Net Present Value (NPV) of Almendarez Corporation’s proposed project, we need to evaluate the present value (PV) of the expected cash flows associated with the project. Here’s how we break it down step-by-step:
Key Information:
- Initial Investment (Cost of Machine): $190,000
- Salvage Value after 10 years: $16,000
- Annual Savings: $32,000
- Project Life: 10 years
- Required Rate of Return (Discount Rate): 13%
Step 1: Calculate the Present Value of the Annual Savings
The annual savings are $32,000, and these savings occur for 10 years. We need to calculate the present value of these savings using the 13% discount rate. We use the Present Value Annuity Factor (PVAF) for 13% over 10 years from the tables.
- PVAF for 10 years at 13% is typically 5.426.
So, the present value of the annual savings is:
[
\text{PV of Savings} = \text{Annual Savings} \times \text{PVAF}
]
[
\text{PV of Savings} = 32,000 \times 5.426 = 173,632
]
Step 2: Calculate the Present Value of the Salvage Value
The salvage value at the end of 10 years is $16,000. We need to calculate the present value of this amount discounted at 13% for 10 years. Using the Present Value Factor (PVF) for 10 years at 13%, we can find this factor in the table:
- PVF for 10 years at 13% is typically 0.322.
So, the present value of the salvage value is:
[
\text{PV of Salvage Value} = 16,000 \times 0.322 = 5,152
]
Step 3: Calculate the Net Present Value (NPV)
Now we can calculate the NPV by subtracting the initial investment from the total present value of the cash inflows (annual savings and salvage value).
[
\text{NPV} = \text{PV of Savings} + \text{PV of Salvage Value} – \text{Initial Investment}
]
[
\text{NPV} = 173,632 + 5,152 – 190,000 = -11,216
]
Conclusion:
The NPV is approximately -$11,216, which means the project would result in a loss of about $11,216. Based on this calculation, the company would not meet its required return of 13% for this investment.
From the multiple-choice options you provided, it seems that there might be a discrepancy with the options since the correct NPV is a negative value (around -11,216), and none of the provided options match exactly. However, it’s important to note that the correct answer based on the data is closest to $(20,995) if the question had included small rounding errors or miscalculations.