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Managerial Accounting

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Heron Co. NPV and Purchase Recommendation

MGRACT-FRBPYE

The Heron Co. wants to buy a new machine at a cost of \$380,000. The investment is expected to generate \$97,000 in net after-tax annual cash flows for a period of five years. The required rate of return is 11%.

The old machine can be sold for \$20,000 (its book value). The new machine is expected to have zero salvage value at the end of the five-year life.

What is the net present value of the investment (rounded to the nearest dollar)? Would the company want to purchase the new machine?

Hint: Using tables rather than Excel or a financial calculator may result in slightly different amounts due to rounding in the tables.

A

(\$1,498), do not recommend purchase

B

(\$358,502), do not recommend purchase

C

\$1,498, recommend purchase

D

\$358,502, recommend purchase