Mac Products Inc.is considering the purchase of a new machine.The estimated cost of the machine is $30 000.The machine is expected to generate annual cash inflows over the next three years as follows:
$$\begin{array} { c c }
\text { Year } & \text { Annual cash flow } \
\hline 1 &\$25000 \
2 & \$20000 \
3 & \$15000
\end{array}$$
The machine will be depreciated over its three-year life using the straight-line method and is not expected to have a residual value at the end of its useful life.The company considers income tax effects in all of its capital investment decisions.If the company's income tax rate is 35 per cent and they desire an after-tax return of 14 per cent on investments,the net present value of the new machine is:

Question

Mac Products Inc.is considering the purchase of a new machine.The estimated cost of the machine is $30 000.The machine is expected to generate annual cash inflows over the next three years as follows:
$$\begin{array} { c c } 
\text { Year } & \text { Annual cash flow } \
\hline 1 &\$25000 \
2 & \$20000 \
3 & \$15000
\end{array}$$
The machine will be depreciated over its three-year life using the straight-line method and is not expected to have a residual value at the end of its useful life.The company considers income tax effects in all of its capital investment decisions.If the company's income tax rate is 35 per cent and they desire an after-tax return of 14 per cent on investments,the net present value of the new machine is:

Quizplus · Accepted Answer

The correct answer is A because the net present value of the new machine is $8965. The net present value is calculated by discounting the future cash flows back to the present at the desired rate of return. In this case, the desired rate of return is 14% and the future cash flows are $25000, $20000, and $15000. The net present value is calculated as follows:NPV = -Initial investment + (CF1 / (1 + r)^1) + (CF2 / (1 + r)^2) + (CF3 / (1 + r)^3)NPV = -$30000 + ($25000 / (1 + 0.14)^1) + ($20000 / (1 + 0.14)^2) + ($15000 / (1 + 0.14)^3)NPV = -$30000 + $21929.82 + $17561.24 + $12373.03NPV = $8965

Mac Products Inc Year Annual cash flow 1$250002$200003$15000\begin{array} { c c } \text { Year } & \text { Annual cash flow } \\\hline 1 &\$25000 \\2 & \$20000 \\3 & \$15000\end{array} Year 123​ Annual cash flow $25000$20000$15000​​

Mac Products Inc $\begin{array} { c c } \text { Year } & \text { Annual cash flow } \\\hline 1 &\$25000 \\2 & \$20000 \\3 & \$15000\end{array}$