Almendarez Corporation is considering the purchase of a machine that would cost $150,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $39,000. The company requires a minimum pretax return of 13% on all investment projects. (Ignore income taxes.)The net present value of the proposed project is closest to: a. $(45,000)b. $(3,063)c. $11,983d. $(18,410)

b. $(3,063)  

Explanation:

This can be calculated as the present value of a cost-saving project, with rate of return equal to 13%. In the table, its the cash flow (in thousands of dollars)

Item/Year                    0            1          2         3        4         5

Cost-savings                           39       39       39       39       39

Salvage value                                                                       18

Purchase                  -150

TOTAL                      -150        39       39       39       39       57

With these cash flows, we can calculate the present value discounting at the rate of return of 13%:

The present value is closest to Option b. $(3,063)  

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