Memphis Co

question 37

Multiple Choice

Memphis Co. is going to purchase a machine for $83,200 that will increase cash flows by $40,000 in the first year, $30,000 the second year, and $25,000 the third year. The machine will have no residual value. The minimum rate of return is 10 percent. The present value factors for the three years are 0.909, 0.826, and 0.751, respectively. The machine's net present value is

• A) $21,800.
• B) ($3,285).
• C) $79,915.
• D) ($4,286).

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Definitions:

Net Present Value

A calculation that compares the value of all cash inflows and outflows of a project or investment using a specified discount rate.

Cash Inflows

Funds entering a business or project, typically received through sales, investments, or financing.

Cash Outflows

Money spent or costs incurred by a business or individual, resulting in a decrease in cash assets.

Internal Rate

Internal rate usually refers to the internal rate of return (IRR), a financial metric used to assess the profitability of investments by calculating the interest rate that makes the net present value (NPV) of all cash flows from a particular project or investment equal to zero.