Question

A company is considering the purchase of new equipment for $96,000. The projected annual net cash flows are $37,700. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 8% return on investment. The present value of an annuity of $1 for various periods follows: Period Present value of an annuity of $1 at 8% 1 0.9259 2 1.7833 3 2.5771 What is the net present value of this machine assuming all cash flows occur at year-end

Answer 1

$1,157

Step-by-step explanation:

As per the given question the solution of net present value is provided below:-

To reach out the net present value first we will find the present value of annuity

Present value of annuity = Annuity × PVIFA factor of 3 years at 8%

= $37,700 × 2.5771

= $97,156.67

Net present value = Present value of inflows - Present value of outflows

= $97,156.67 - $96,000

= $1,157

So, we have calculated the net present value by using the above formula.