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Griffith Corporation is considering an investment in a labor-saving machine
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.
- $(6,283)
- $(3,806)
- $(23,451)
- $(22,000)
Expert Solution
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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