Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 116

An organization decided to invest in new office equipment for $320,000. The estimated useful life of the equipment is four years. The residual value will be $40,000. The depreciation method is straight-line. The new equipment will allow the organization to save $150,000 per year. The estimated tax rate used in the organization is 30 percent. The required rate of return is 15 percent. The following are present values of $1 during four years for 15 percent:

Year 1 = $0.87 -

Year 2 = $0.76 -

Year 3 = $0.66 -

Year 4 = $0.57 -

What is net present value of this investment?

Answer options

Correct answer: D

Explanation

The net present value (NPV) is calculated by discounting the cash flows from the savings and subtracting the initial investment. After accounting for taxes and applying the present value factors, the calculations yield an NPV of $3,100, making option D the correct answer. The other options do not accurately reflect the NPV after considering all financial factors.