Whitton Corporation uses a discount rate of 16%. The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years. The machine would have no salvage value. The net present value of this machine is closest to (Ignore income taxes.):Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to find the present value (PV) of each cash inflow and subtract the initial investment.

Using the PV annuity table, we can find the discount factor for an annuity of $10,000 per year for three years at a discount rate of 16%. The factor is 2.5771.

PV of cash inflows: 
$10,000 x 2.5771 = $25,771

Now we need to subtract the initial investment of $18,000: 
$25,771 - $18,000 = $7,771

Therefore, the net present value is $7,771, which is closest to answer choice B ($4,460).

Whitton Corporation Uses a Discount Rate of 16