Daniels Corporation is considering the purchase of new equipment costing $30,000

Question

Daniels 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.

Daniels requires a 12% return on its investments. The present value of an annuity of 1 for different

periods follows:

What is the net

present value of

the machine?

A. $24,018.

B. $(3,100).

C. $30,000.

D. $26,900.

E. $(29,520)

Explanation / Answer

The answer is B.

NPV= preset value of cash flows - initial investment

NPV= present value of annuity - initial investment

NPV= 11,200 x 2.40183 (annuity factor n=3 i=12%) - 30,000

NPV= (3,099.5) or (3,100)

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