Question

Norman Co. wants to purchase a machine for $40,000, but needs to earn an 8% return. The expected year-end net cash flows are $12,000 in each of the first three years, and $16,000 in the fourth year. What is the machine's net present value (round to the nearest whole dollar)?

Answer 1

Year Cashflow D@8% PV

$ $

0 (40,000) 1 (40,000)

1 12,000 0.9259 11,111

2 12,000 0.8573 10,288

3 12,000 0.7938 9,526

4 16,000 0.7350 11,760

NPV 2,685

Step-by-step explanation:

Net present value is the difference between present value of cash inflows and initial outlay. The present value of cash inflows were obtained by multiplying the cash inflows by discount factors. The discount factors were calculated using the formula (1 + r)-n, where n represents number of years and r denotes discount rate.