Reed is interested in purchasing a machine for his business that costs $10,000. The machine would be used for three years and generate $4,000 per year of cash flow. After three years, the machine could be sold for $3,000. What is the net present value of the machine at 12%?

Question

Quizplus · Accepted Answer

The net present value (NPV) of the machine can be calculated by discounting the future cash flows (including the sale of the machine) back to their present value at the given discount rate of 12%, and then subtracting the initial cost of the machine. The cash flows are $4,000 per year for three years and a final cash flow of $3,000 from the sale of the machine at the end of year three. The NPV calculation results in $1,742.67.

Reed Is Interested in Purchasing a Machine for His Business