28) SHOw WORK. Butler Corporation is considering the purchase of new equipment c

Question

28) SHOw WORK. Butler Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 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 12% return on its investments. The present value of an annuity of $1 for different periods follows: Periods 12% 0.8929 2 3 4 1.6901 2.4018 3.0373 What is the net present value of the machine? A) $24,018. B) S(3,100) C) S30,000 D) $26,900. E) S(29,520). et cash lows Present value of an annuity at 12% Present value of et cash flows ears 1-3 Amount invested et present value

Explanation / Answer

while we are calculating cash inflows to a business we have to add back the depreciation since it is a non cash expenditure

therfore net cash inflows is $1200+$10000 = $11200

present value of cash inflows at 12% for 3 years is $11200*2.4018 = 26900.16

present value of initial investment is $30000

net present value is PV of cash inflows-PV of initial investment

$26900.16-$30000 = 3099.84 roundig off to ($3100)

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