Question

The following present value factors are provided for use in this problem.

Periods Present Value of $1 at 11% Present Value of an Annuity of $1 at 11%
1 0.9009 0.9009
2 0.8116 1.7125
3 0.7312 2.4437
4 0.6587 3.1024
Cliff Co. wants to purchase a machine for $42,000, but needs to earn an 11% return. The expected year-end net cash flows are $14,000 in each of the first three years, and $18,000 in the fourth year. What is the machine's net present value?
a. $7,788
b. $4,069.

Answer 1

B

Step-by-step explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.

When choosing between positive NPV projects, choose the project with the highest NPV first because it is the most profitable.

Cash flow in year 0 = $-42,000,

Cash flow in year 1 = $14,000

Cash flow in year 2 = $14,000

Cash flow in year 3 = $14,000

Cash flow in year 4 = $18,000

I = 11 %

NPV = $4,069.

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute