Answer the Following Questions Using the Information Below

question 68

Multiple Choice

Answer the following questions using the information below:
Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $120,000. The new machine will cost $400,000 and an additional cash investment in working capital of $120,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $100,000 in additional cash inflows during the year of acquisition and $300,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life.
-What is the net present value of the investment, assuming the required rate of return is 10%? Would the company want to purchase the new machine?

• A)$164,000; yes
• B)$100,000; no
• C)$(100,000); yes
• D)$(164,000); no

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Definitions:

Diaphysis

The diaphysis is the main or midsection (shaft) of a long bone, distinguished from the bone's ends or epiphyses.

Disk

A flat, thin, round object or medium, often used for storing digital data.

Femur

The femur is the thigh bone, which is the longest and strongest bone in the human body.

Cavity

A hole or space within the body or a solid structure, often referring to tooth decay in dentistry or a hollow area in anatomy.