A machine cost $46,000 and had a useful life of 4 years and a residual value of $7,000. What is the net present value of the machine if the annual cash flow is $16,000 and the company uses a discount rate of 10%? An annuity table shows the present value of $1 at 10% for 4 years to be 0.683. The present value of an ordinary annuity of $1 discounted at 10% for 4 years is 3.170.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by finding the present value of the cash flows and subtracting the initial investment. The present value of the annual cash flows is $16,000 * 3.170 = $50,720. The present value of the residual value is $7,000 * 0.683 = $4,781. Subtracting the initial cost of $46,000 gives an NPV of $50,720 + $4,781 - $46,000 = $9,501.

A Machine Cost $46,000 and Had a Useful Life of 4