A company is considering the purchase of new equipment for $63,000. The projecte

Question

A company is considering the purchase of new equipment for $63,000. The projected after-tax net income is $3,600 after deducting $21,000 of depreciation. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 11% return on investment. The present value of an annuity of 1 for various periods follows:   Periods Present value of an annuity of 1 at 11%  1 0.9009  2 1.7125  3 2.4437  What is the net present value of this machine assuming all cash flows occur at year-end?   $(2,885)    $3,600    $21,000    $24,600    $60,115

Explanation / Answer

Annual cashflows for each of the 3 years = net income+depreciation = 3,600+21,000 = 24,600

PV of the 3 year cashflows using the annuity factor of 2.4437 given in the question = 24,600*2.4437 = 60,115.02

So NPV = 60,115-63,000 = (2,885)

Hope this helped ! Let me know in case of any queries.

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