Question

Poe Company is considering the purchase of new equipment costing $89,500. The projected annual cash inflows are $39,700, 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 an annuity of 1 and present value of an annuity for different periods is presented below. 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
A. $(22,101).
B. $(36,345).
C. $22,101.
D. $54,919.
E. $36,345.

Answer 1

Answer: E. $36,345

Step-by-step explanation:

Net present value = Present value of inflows - Cost of equipment

The inflow is an annuity as it is a constant amount so is calculated as:

Present value of inflows = Inflow * Present value interest factor of an annuity, 10%, 4 years

= 39,700 * 3.1699

= $125,845.03

Net present value = 125,845.03 - 89,500

= $36,345.03