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27 February, 22:39

9. Mackenzie PLC is considering expanding a production line. The new equipment for the line will cost $255,000. In addition, the cost of delivery is $12,250 and there is an annual maintenance contract for $1,500. The new line is expected to generate cash flows for the next four years of 65,000; 98,000; 126,000; and 132,000. Mackenzie's discount rate for the project is 9 3/8%. The net present value of the project is closest to:

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  1. 27 February, 23:07
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    Net Present Value = $59,632.78

    Explanation:

    The net present value NPV) of a project is the present value of cash inflow less the present value of cash outflow of the project.

    NPV = PV of cash inflow - PV of cash outflow

    Present value of cash inflow:

    65,000 * (1.09375) ^ (-1) + 98000 * (1.09375) ^ (-2) + 126,000 * (1.09375) ^ (-3) + 132,000 * (1.09375) ^ (-4) = 326882.7792

    PV of annual maintenance cost:

    =1,500 * (1 - 1.09375^ (-4)) / 0.09375

    =4819.84773

    NPV = 26882.7792 - 4819.84773 - (255,000+12250)

    = 59,632.78
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