Question

Butler Corporation is considering the purchase of new equipment costing $39,000. The projected annual after-tax net income from the equipment is $1,500, after deducting $13,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Butler requires a 9% return on its investments. The present value of an annuity of $1 for different periods follows:

Periods	9%
1	0.9174
2	1.7591
3	2.5313
4	3.2397

What is the net present value of the machine?

Multiple Choice

• $(2,296).

• $36,704.

• $4,500.

• $32,907.

• $39,000.

Answer 1

Answer is $(2,296)

Cost of Equipment = $39,000
Useful Life = 3 years

Annual Net Income = $1,500
Annual Depreciation = $13,000

Annual Net Cash Flows = Annual Net Income + Annual Depreciation
Annual Net Cash Flows = $1,500 + $13,000
Annual Net Cash Flows = $14,500

Required Return = 9%

Net Present Value = -$39,000 + $14,500 * PVA of $1 (9%, 3)
Net Present Value = -$39,000 + $14,500 * 2.5313
Net Present Value = -$2,296