Butler Corporation is considering the purchase of new equipment costing $60,000.

ID: 2474069 • Letter: B

Question

Butler Corporation is considering the purchase of new equipment costing $60,000. The projected annual after-tax net income from the equipment is $2,200, after deducting $20,000 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 Percent 1 0.8929 2 1.6901 3 2.4018 4 3.0373 What is the net present value of the machine?

Explanation / Answer

Calculation of net present value of the machine:

Year

Cash Flows (CF)

PVA (12%)

PV =CF*PVA

Cost of New Equipment

$ (60,000.00)

Projected annual after-tax net income from the equipment = $2200

Add: Depreciation $20000

Projected annual after-tax cash Flows = (2200+20000) =

1 to 3

$ 22,200.00

2.4018

$ 53,319.96

Net Present value =

$ (6,680.04)