Sansariff Company invests in a new piece of equipment costing $40,000. The equipment is expected to yield the following amounts per year for the equipment's four-year useful life: What is the net present value of this investment in equipment, assuming no taxes are paid?

Question

Sansariff Company invests in a new piece of equipment costing $40,000. The equipment is expected to yield the following amounts per year for the equipment's four-year useful life:  What is the net present value of this investment in equipment, assuming no taxes are paid?

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the investment, we need to discount the cash flows back to their present value using a discount rate. Assuming a discount rate of 10%, the calculation would look like this:

Year 1: $15,000 / (1 + 0.10)^1 = $13,636
Year 2: $14,000 / (1 + 0.10)^2 = $11,570
Year 3: $11,000 / (1 + 0.10)^3 = $8,111
Year 4: $10,000 / (1 + 0.10)^4 = $6,210

NPV = -$40,000 + $13,636 + $11,570 + $8,111 + $6,210 = $-0.473

Since the NPV is negative, this investment would not be a good choice for Sansariff Company. Option C is the only answer that matches a negative NPV.

Sansariff Company Invests in a New Piece of Equipment Costing