Question

Butler Corporation is considering the purchase of new equipment costing $84,000. The projected annual after-tax net income from the equipment is $3,000, after deducting $28,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Butler requires a 9% return on its investments. The present value of an annuity of $1 for different periods follows:

Periods 11 Percent
1 0.9009
2 1.7125
3 2.4437
4 3.1024
What is the net present value of the machine?
a. $(4,502).
b. $48,000.
c. $5,400.
d. $43,498.
e. $39,099.

Answer 1

($16,2470.30)

Step-by-step explanation:

After-tax cash flow = After-tax net income + Depreciation

After-tax cash flow = $3,000 + $28,000

After-tax cash flow = $31,000

Net present value = Purchase cost + After-tax cash flow*PVIFA(%, n)

Net present value = -$84,000 + $31,000*PVIFA(9%, 3)

Net present value = -$84,000 + $31,000*2.5313

Net present value = -$84,000 + $78,470.30

Net present value = -$16,2470.30