Sommer Corporation is deciding whether to automate one phase of its production process. The equipment has...
Sommer Corporation is deciding whether to automate one phase of its production process. The equipment has a
six-year life and will cost $410,000. Projected net cash inflows from the equipment are as follows:
|
Year 1 |
$115,000 |
|
Year 2 |
$100,000 |
|
Year 3 |
$110,000 |
|
Year 4 |
$100,000 |
|
Year 5 |
$95,000 |
|
Year 6 |
$90,000 |
Sommer Corporation's hurdle rate is 12%. Assume the residual value is zero.
Which one of the following amounts is the net present value of the Sommer Corporation equipment?
A.
$13,749
B.
$102,679
C.
$200,000
D.
$207,719
Homework Answers
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=115,000/1.12+100,000/1.12^2+110,000/1.12^3+100,000/1.12^4+95,000/1.12^5+90,000/1.12^6
=$423747.95
NPV=Present value of inflows-Present value of outflows
=423747.95-410,000
=$13,749(Approx).
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