Question

A company is considering the purchase of new equipment for $84,000. The projected annual net cash flows are $33,300. 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: PeriodPresent value of an annuity of $1 at 9. 917421. 759132. 5313 What is the net present value of this machine assuming all cash flows occur at year-end

Answer 1

The net present value of the machine is calculated by discounting the projected annual net cash flows using the present value of an annuity factor for 3 years at a 9% rate. After discounting, subtract the initial investment to find the NPV, which in this case is $290.79.

Step-by-step explanation:

The question pertains to calculating the net present value (NPV) of a new equipment purchase, considering the time value of money. To find the NPV, we must discount the annual net cash flows back to their present value using the required return rate, which is 9% in this case. With the projected annual net cash flows of $33,300 for 3 years, and no salvage value, we use the present value of an annuity factor for 3 periods at 9%, which is provided as 2.5313. The calculation is as follows:

• Determine the total present value of the net cash flows: $33,300 * 2.5313 = $84,290.79
• Subtract the initial investment to get the NPV: $84,290.79 - $84,000 = $290.79

Therefore, the net present value of this machine, assuming all cash flows occur at the year-end, is $290.79.