Question

Butler Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Butler 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

($3,100)

Step-by-step explanation:

The computation of net present value is shown below:-

For computing the net present value first we need to find out the net cash flow each year and total value of inflows in 3 years which is here below:-

Net cash flows each year = Projected annual after-tax net income + Depreciation

= $1,200 + $10,000

= $11,200

Total value of inflows in 3 years = Net cash flows each year × Annuity factor of 3 years

= $11,200 × 2.4018

= $26,900

Net Present value = Present value of inflows - Cash outflow

= $26,900 - $30,000

= ($3,100)