The management of retz corporation is considering the purchase of a new machine costing $500,000. 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, and 0.621, respectively. in addition to the foregoing information, use the following data in determining the acceptability of this investment:
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:

The present value index is 0.91 which is less than 1. So, the investment should not be accepted.

Explanation:

Present Value Index : It shows the ratio between the sum of present value of all years cash inflows after applying the discount rate and initial investment.

In mathematically,

Present value index = Sum of present value of all years cash flows with discount rate ÷ Initial Investment

where,

Present value = Net cash flow × Discount rate

So,

Year 1 = $180,000 × 0.909 = $163,620

Year 2 = $120,000 × 0.826 = $99,120

Year 3 = $100,000 × 0.751 = $75,100

Year 4 = $90,000 × 0.683 = $61,470

Year 5 = $90,000 × 0.621 = $55,890

Now, Sum all the yearly cash inflows which equals to

= $163,620 + $99,120 + $75,100 + $61,470 + $55,890

= $455,200

So, the present value index = $455,200 ÷ $500,000 = 0.91

Hence, the present value index is 0.91 which is less than 1. So, the investment should not be accepted.

its simple as this, microeconomics is the study of economics at an individual, group or company level, macroeconomics on the other hand, is the study of a national economy as a whole.

hope it =^-^=

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