Poe Company is considering the purchase of new equipment costing $80,000. The pr

Question

Poe Company is considering the purchase of new equipment costing $80,000. The projected net cash flows are $35,000 for the first two years and $30,000 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 ($15,731). ($4,896). $15,731. $4,896. $23,775.

Explanation / Answer

Net present value of the machine = (35000*0.9091)+(35000*0.0.8264)+(30000*0.7513)+(30000*0.683)-80000= 23775

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