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Griffith Corporation is considering an investment in a labor-saving machine

Accounting

Griffith Corporation is considering an investment in a labor-saving machine. Information on this machine follows:

Cost

$30,000

Salvage value in five years

$0

Estimated life

5  years

Annual depreciation

$6,000

Annual reduction in existing costs

$8,000

 Refer to Griffith Corporation. Assume for this question only that Griffith Corporation uses a discount rate of 16 percent to evaluate projects of this type. What is the project's net present value? Present value tables or a financial calculator are required.

  1. $(6,283)
  2. $(3,806)
  3. $(23,451)
  4. $(22,000)

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Answer:

B . $ 3,806

Step-by-Step explanation

Present value of cash benefits = $8,000 * Present value annuity factor for 5 years at the rate of 16%.

=> $8,000 * 3.2743 = $26,194.35.

Net present value (NPV) = Present value of cash inflows - Present value of cash outflow

=> $26,194.35 - $30,000 = -$3,806.

 

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