Poe Company is considering the purchase of new equipment costing $87,500. The pr
ID: 2598974 • Letter: P
Question
Poe Company is considering the purchase of new equipment costing $87,500. The projected net cash flows are $43,000 for the first two years and $37,700 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 anAnnuity of 1 at 10% 1 0.9091 0.9091 2 0.8264 1.7355 3 0.7513 2.4869 4 0.6830 3.1699Explanation / Answer
Compute the net present value of the machine.
Net present value = Present value of cash inflow-Present value of cash outflow
= (43000*.9091+43000*.8264+37700*.7513+37700*.6830)-87500
Net present value = 41200
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