Question

Vextra Corporation is considering the purchase of new equipment costing $35,000. The projected annual cash inflow is $11,000, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Vextra requires a 12% return on its investments. The present value of an annuity of $1 for different periods follows: Periods 12% 1 0.8929 2 1.6901 3 2.4018 4 3.0373 What is the net present value of the machine

Answer 1

The net present value of the machine = $ 1590

Step-by-step explanation:

Solution

The first step is to compute the present value of annual cash inflows as shown below:

The present value of the inflow of cash = (Annual inflow of cash * PVIFA rate, period)

which is

= $11,000 * PVIFA 12%, 4

= $11,000 * 3.0373

= $ 33,410

Note: the present value of inflow of cash has been computed by multiplying Annual cash inflows and Cumulative factor of 12% and 4 years. Annual cash inflow is $11,000 and from the table of PVIFA rate for a 4 periods at 12% discount rate is 3.0373.

Next step is to compute the Net value as shown in the equation below:

Net present value = (present value of inflow of cash - Investment)

which is

=$ 33, 410 - $ 35,000

= $1590

The net present value is = $ 1590

Note: Net present value has been computed be subtracting investment from the present value of inflow of cash.

The opening investment is $35,000 and the present value of inflow of cash is $33,410. since the initial investment is more than the present value of cash inflows, the net present value is seen as negative.