The following present value factors are provided for use in this problem. Periods Present Value of $1 at 8% Present Value of an Annuity of $1 at 8%1 0.9259 0.92592 0.8573 1.78333 0.7938 2.57714 0.7350 3.3121Xavier Company wants to purchase an asset for $37,000 with a four-year life and a $1,000 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $12,000 in each of the four years. What is the machine's net present value (round to the nearest whole dollar)?
Question
The following present value factors are provided for use in this problem. Periods Present Value of 1 at 8%1 0.9259 0.92592 0.8573 1.78333 0.7938 2.57714 0.7350 3.3121Xavier Company wants to purchase an asset for 1,000 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $12,000 in each of the four years. What is the machine's net present value (round to the nearest whole dollar)?
Solution
To calculate the net present value (NPV), we need to discount the expected cash flows to their present value and then subtract the initial investment.
Step 1: Calculate the present value of the cash inflows.
The expected year-end net cash flows are 1 at 8% for four years is 3.3121 (given in the problem).
So, the present value of the cash inflows is 39,745.20
Step 2: Calculate the present value of the cash outflows.
The initial cost of the machine is 1,000. The present value of $1 at 8% for four years is 0.7350 (given in the problem).
So, the present value of the cash outflows is 1,000 * 0.7350) = $37,735
Step 3: Calculate the net present value.
The net present value is the present value of the cash inflows minus the present value of the cash outflows.
So, the NPV is 37,735 = $2,010.20
Rounded to the nearest whole dollar, the machine's net present value is $2,010.
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