How to Compute NPV? Managerial Accounting?

Question

A manager at the Administrative Computer Center of Olympia State University is contemplating acquiring 120 computers. The computers will cost $320,000 cash have zero terminal salvage value, and a useful life of three years. Annual cash savings from operations will be $150,000. The required rate of return is 14%. There are no taxes.

1. Compute NPV

2. Should the Computer Center acquire the computers? Explain.

Answer 1

Net present value is found by taking the original investment cost, $320,000 (that would be a negative amount since it's cash out the door), and then adding the present value of the annual cash savings expected ($150,000 for 3 years at the required rate of return of 14%). You look up in the present value annuity table the factor for 3 years at 14%, which is 2.322, and multiply by $150,000 to get present value of expected cash savings = $348,300.

Net present value = $348,300 - $320,000 = $28,300

SInce the net present value is greater than zero, the proposed purchase is desirable since it promises a return greater than the required rate of return.