Butler Corporation is considering the purchase of new equipment costing $51,000.

Question

Butler Corporation is considering the purchase of new equipment costing $51,000. The projected annual after-tax net income from the equipment is $1,900, after deducting $17,000 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 10% return on its investments. The present value of an annuity of 1 for different periods follows: Periods 10 Percent 1 0.9091 2 1.7355 3 2.4869 4 3.1699 What is the net present value of the machine?

Explanation / Answer

Net cash flows Present value of an annuity at 10% Present value of net cash flows Years 1?3 $1,900 + $17,000 2.4869 $47,002 Amount invested ($51,000) Net present value ($3,998)

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