Net present value of the investment in new production line

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Reference no: EM132070341

1. Mighty Manufacturing is considering investing $600,000 in a new production line. The new equipment is expected to generate a savings of $200,000 per year for each of the next five years. Mighty’s cost of capital is 5 percent. What is the net present value of the investment in the new production line? Disregard the effect of depreciation and taxes.

A. $565,880.

B. $456,980.

C. $265,880.

D. $650,490.

2. Parts Equipment Company is evaluating a plan to refit its machinery. The expected cost is $75,000, payable immediately. The expected reduction in cash outflow at the end of each year is as follows:

Years 1 – 3 $60,000 each year

Year 4 $25,000

If the interest rate is seven percent, what is the net present value of this investment in new machinery? Disregard the effect of depreciation and taxes.

A. $101,530.

B. $150,596.

C. $-124,094.

D. $-16,093.

4. When the net present value (NPV) method is used, an acceptable proposal is...

A. Projected cash inflows have a present value greater than the present value of the required outflows.

B. Rate of return exceeds the minimum acceptable rate of return.

C. Rate of return exceeds the current bank lending rate.

D. Rate of return is limited to the current bank lending rate.

5. Big Manufacturing Company is considering purchase of a new facility. The following factors apply:

• $250,000 initial investment

• 10 year life of facility (no salvage value)

• $80,000 differential cash revenues from the purchase

• Annual expected flood losses to facility are $15,000

• Straight-line depreciation is used

• 40 percent tax rate

• Minimum annual acceptable rate of return is 10 percent Present value of $1 received at the end of each year for 10 years at 10 percent is 6.1446

A. $85,093.

B. $75,663.

C. $35,215.

D. $87,215.

Reference no: EM132070341

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