Question

The management of Salem Corporation is considering the purchase of equipment costing $109,000, which has an estimated life of 3 years and no salvage value. The net after tax cash flow from the project for each of the three years is expected to be $45,000. The company's cost of capital is 10%.

Compute the net present value of the equipment. (Present value of $1 due in three years, discounted at 10%, is 0.751; present value of $1 received annually for three years, discounted at 10% is 2.487.)

a. $2,548

b. $3,616

c. $2,915

d. $5,3213

Answer 1

The correct option is C.$2,915

Step-by-step explanation:

The net present value of the equipment is the initial investment of $109,000 minus the present worth of the net after tax cash cash inflow of $45,000 for three years.

The present worth is computed by multiplying the $45,000 by the discount factor of 2.487 which gives $111,915 ($45,000*2.487).

NPV=-initial investment +present of cash inflow

NPV=-$109,000+$111,915

NPV =$2,915

The correct option as a result of the above calculation is option C.