A company is considering the purchase of new equipment for $78,000. The projected annual net cash...
A company is
considering the purchase of new equipment for $78,000. The
projected annual net cash flows are $31,100. The machine has a
useful life of 3 years and no salvage value. Management of the
company requires a 9% return on investment. The present value of an
annuity of $1 for various periods follows:
| Period | Present value of an annuity of $1 at 9% |
| 1 | 0.9174 |
| 2 | 1.7591 |
| 3 | 2.5313 |
What is the net present value of this machine assuming all cash
flows occur at year-end?
Homework Answers
| Computation of Net Present Value | ||||||
| Year | Cashflow (a) | Present Value Factor(b) | Discounted Cashflows(a X b) | |||
| 0 | Cash outflow (Cost of Machinery) | $ -78,000 | 1 | $ -78,000 | ||
| 1 to 3 Year | Annual Net cash inflows | $ 31,100 | 2.5313 | $ 78,723 | (Rounded off) | |
| Net present Value of Machine- | $ 723 | |||||
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