Question

Poe Company is considering the purchase of new equipment costing $80,000. The projected annual cash inflows are $30,200, 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 $1 and present value of an annuity of $1 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 0.7514 2.4869 4 0.6830 3.1699

Answer 1

Net Present Value = $15,729.94

Step-by-step explanation:

The Net present value (NPV) is the difference between the Present value (PV) of cash inflows and the PV of cash outflows. A positive NPV implies a good investment decision and a negative figure implies the opposite.

NPV of an investment:

NPV = PV of Cash inflows - PV of cash outflow

PV of cash inflow = A× (1- (1+r)^(-n))/r

A- annul cash inflow, r- 10%, n- 4

PV of cash inflow= 30,200 × (1- 1.1^(-4))/0.1

= 95,729.94 .

Initial cost = 80,000

NPV = 95,729.94 - 80,000

= $15,729.94