Sam is considering the purchase of a vending machine to sell sodas. The cost of the vending machine is $3,400. Sam estimates that the vending machine will last for five years and will provide net income of $800 each year for its lifetime. If Sam pays $3,400 for the vending machine today, the net present value at 7% is $____.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows back to their present value and then subtracting the initial investment. Here, the future cash flows are $800 per year for 5 years, and the discount rate is 7%. Using the formula for NPV: NPV = (Cash Flow / (1 + r)^t) - Initial Investment, where r is the discount rate and t is the time period, we calculate the present value of each cash flow and sum them up, then subtract the initial investment of $3,400. The calculation results in a negative NPV of approximately -119.84, indicating that the investment would result in a loss when considering the time value of money at a 7% discount rate.

Sam Is Considering the Purchase of a Vending Machine to Sell