Choice "B" is correct. The net present value of the project is $20,155. Net present value is computed as the difference between the present value of the initial cash outflows of the investment and the present value of the cash inflows from the project. Periodic cash flows are discounted using the present value of an annuity while single cash inflows are discounted using the present value of $1. The data required to compute net present value is provided in the fact pattern:
| Value
| | PV Factor
| | Present Value
| |
|---|
Investment | ($100,000) | × | 1.000 | = | ($100,000) | (Cash outflow) |
Annual Cash Inflow | 25,000 | × | 4.355 | = | 108,875 | Cash inflow |
Salvage value | 20,000 | × | 0.564 | = | 11,280 | Cash inflow |
Net present value | | | | | $20,155 | Positive |
Choice "c" is incorrect. The proposed solution of ($2,405) anticipates that the salvage value will decrease rather than increase cash flows. Salvage value is a cash inflow at the end of the life of the machine.Choice "a" is incorrect. The proposed solution of $8,875 does not consider the salvage value.
Choice "d" is incorrect. The proposed solution of $28,875 does not discount the salvage value.
