Poe Company is considering the purchase of new equipment costing $87,500. The pr

Question

Poe Company is considering the purchase of new equipment costing $87,500. The projected net cash flows are $42,500 for the first two years and $37,500 for years three and four. The revenue is to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of an annuity of $1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine.

Periods Present value
of $1 at 10% Present value of an
Annuity of $1 at 10% 1 0.9091 0.9091 2 0.8264 1.7355 3 0.7513 2.4869 4 0.6830 3.1699

Explanation / Answer

Net Present value = Present value of cash inflow-Present value of cash outflow

= (42500*1.7355+37500*1.4343)-87500

Net present value = 40045

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