Palmetto Products is considering the purchase of a new industrial machine. The e

Question

Palmetto Products is considering the purchase of a new industrial machine. The estimated cost of the machine is $50,000. The machine is expected to generate annual cash inflows for the next four years as follows:

Year
Annual cash flow
1
$25,000
2
$20,000
3
$20,000
4
$15,000
The machine is not expected to have a residual value at the end of its useful life. If Palmetto uses a discount rate of 16%, what is the expected net present value of the machine? (ignore taxes)
Answer
a. $12,800
b. $18,969
c. ($5,816)
d. $7,515

Explanation / Answer

25,000/1.16 + 20,000/1.16^2 + 20,000/1.16^3 + 15/1.16^4 – 50,000 = 7515 Answer: D, $7515

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