Butler Corporation is considering the purchase of new equipment costing $78,000.

Question

Butler Corporation is considering the purchase of new equipment costing $78,000. The projected annual after-tax net income from the equipment is $2,800, after deducting $26,000 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 11% return on its investments. The present value of an annuity of 1 for different periods follows: Periods 11 Percent 1 0.9009 2 1.7125 3 2.4437 4 3.1024 What is the net present value of the machine? (closest to) $78,000.

Explanation / Answer

Annual cash flows=Net income+Depreciation

=(2800+26000)=$28800

Hence Present value of inflows=Annual cash flows*PResent value of annuity factor(11%,3)

=$28800*2.4437

=$70378.56

NPV=Present value of inflows-Present value of outflows

=$70378.56-$78000

=(7621.44)(Approx)

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