A company is considering the purchase of new equipment for $45,000. The projecte

Question

A company is considering the purchase of new equipment for $45,000. The projected after tax net in mod is $3,000 after deducting $15,000 of depreciation ther machine has a useful life of 3 years and no salvage value. Management of the company requiresa 12%return on investment  the present value of annuity of 1 for the various periods follows

Period-present value of annuity of 1 at 12%

1----0.8929

2.......1.6901

3.......2.4018

What is the net present value of this machine assuming all cash flows occur at year end?

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Outflow = - 45000

Annual Cash Inflows = 3000 (Net Income After Tax) + 15000 (Depreciation) = 18000

NPV = - 45000 + 18000*PVIFA*(12%, 3 Years) = -45000 + 18000*2.4018 = -1767.60

Answer is -1767.60.

Thanks.

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