The management of Cooper Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0. 909, 0. 826, 0. 751, 0. 683, 0. 621, respectively. In addition to this information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 20,000 100,000 4 10,000 90,000 5 10,000 90,000 The present value index for this investment is a.1.45. b.1.08. c.0.92. d.0.36.

Question

contestada

Respuesta :

andromache andromache · Answer 1 · 2020-08-09T03:36:14+02:00

Answer:

b.1.08.

Explanation:

The computation of the present value index is shown below;

As we know that

Present Value Index = Present value of Net Cash Inflow ÷ Initial Cash outflow

where,

Initial investment = $420,000

And, the present value of net cash inflows are

Year Cash Flow (in $) PVF at 10% Present Value (in $)

1 180,000 0.909 163,620

2 120,000 0.826 99,120

3 100,000 0.751 75,100

4 90,000 0.683 61,470

5 90,000 0.621 55,890

TOTAL 455,200

So, the present value index is

= $455,200 ÷ $420,000

= 1.08