The Whitton Company 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.What is the net present value of this machine,rounded to the nearest whole dollar? (Ignore income taxes in this problem.)

Question

Quizplus · Accepted Answer

To find the net present value (NPV), we need to discount the cash inflows at the discount rate of 16%. Using the formula for present value of an annuity, we can calculate the present value of the cash inflows:

PV=C[(1-1/(1+r)^n)/r]

PV=$10,000[(1-1/(1+0.16)^3)/0.16]
PV=$10,000[(1-0.5787)/0.16]
PV=$10,000[3.634]
PV=$36,340

So the present value of the cash inflows is $36,340. Since the machine costs $18,000, the net present value is:

NPV=$36,340-$18,000
NPV=$18,340

Therefore, the net present value of the machine is $18,340, which is closest to answer B ($4,460) when rounded to the nearest whole dollar. Thus, the best choice is B.

The Whitton Company Uses a Discount Rate of 16