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A company is considering the purchase of new equipment for $60,000. The projected annual net cash flows are $24,500. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 10% return on investment. The present value of an annuity of $1 for various periods follows: Period Present value of an annuity of $1 at 10%1 0.90912 1.73553 2.4869What is the net present value of this machine (rounded to the nearest whole dollar) assuming all cash flows occur at year-end?

Question

A company is considering the purchase of new equipment for 60,000.Theprojectedannualnetcashflowsare60,000. The projected annual net cash flows are 24,500. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 10% return on investment. The present value of an annuity of 1forvariousperiodsfollows: PeriodPresentvalueofanannuityof1 for various periods follows: Period Present value of an annuity of 1 at 10%1 0.90912 1.73553 2.4869What is the net present value of this machine (rounded to the nearest whole dollar) assuming all cash flows occur at year-end?

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Solution

To calculate the net present value (NPV) of the machine, we need to follow these steps:

  1. Calculate the present value of the cash inflows: The company expects to receive 24,500peryearfor3years.Thepresentvalueofanannuityof24,500 per year for 3 years. The present value of an annuity of 1 for 3 years at a 10% discount rate is 2.4869. So, the present value of the cash inflows is 24,5002.4869=24,500 * 2.4869 = 60,999 (rounded to the nearest whole dollar).

  2. Subtract the cost of the machine: The machine costs 60,000.So,theNPVofthemachineis60,000. So, the NPV of the machine is 60,999 - 60,000=60,000 = 999.

So, the net present value of the machine is $999.

This problem has been solved

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