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22 February, 12:50

T-Bone company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $141,000. Should the company invest in this project? a. no, because net present value is - $9,000 b. yes, because net present value is - $9,000 c. yes, because net present value is + $9,000 d. no, because net present value is + $9,000

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  1. 22 February, 13:04
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    The correct answer is:

    no, because net present value is - $9,000 (a.)

    Explanation:

    The aim of investments normally is to yield profit, and this means that the return on investments should be greater than the amount invested, hence yielding a positive (+) net value. In this example, the amount to be invested is $150,000 and the return on investment (present value of the future cash flows) is expected to be $141,000.

    The net value of the investment is calculated as:

    Net value = Future cash flows - amount to be invested

    Net value = 141,000 - 150,000 = - $9,000

    This means that the total return on the original invested is less than the original investment by $9,000, which is a loss, therefore the company should not invest in the project.
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