Question

Poe Company is considering the purchase of new equipment costing $86,500. The projected annual cash inflows are $36,700, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of $1 and present value of an annuity of $1 for different periods is presented below.

1. Compute the net present value of the machine.
Periods Present Value of $1 at 10% Present Value of an Annuity of $1 at 10%
1 0.9091 0.9091
2 0.8264 1.7355
3 0.7513 2.4869
4 0.6830 3.1699

Answer 1

Year Cashflow DF@10% PV

$ $

0 (86,500) 1 (86,500)

1-4 36,700 3.1699 116,335

NPV 29,835

Step-by-step explanation:

In this case, there is need to discount the annual cash inflow at the present value of annuity factor for 4 years, which is 3.1699. Then, we will determine the present value of annual cash inflow by multiplying the annual cash inflow by the annuity factor. The net present value of the equipment is the present value of annual cash inflow minus initial outlay.