A company is considering the purchase of new equipment for $45,000. The projecte

Question

A company is considering the purchase of new equipment for $45,000. The projected after-tax net income is $3,000 after deducting $15,000 of depreciation. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 12% return on investment. the present value of an annuity of 1 for various periods follows: Period Present value of an annuity of 1 at 12% 1. 0.8929 2. 1.6901 3. 2.4018 What is the net present value of this machine assuming all cash flows occur at year-end?

Explanation / Answer

Please find the answer as follows:

Initial Outflow = - 45000

Annual Cash Inflows = 3000 (Net Income After Tax) + 15000 (Depreciation) = 18000

NPV = - 45000 + 18000*PVIFA*(12%, 3 Years) = -45000 + 18000*2.4018 = -1767.60

Answer is -1767.60.

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