Stratford Company purchased a machine with an estimated useful life of seven years.The machine will generate cash inflows of $90,000 each year over the next seven years.If the machine has no salvage value at the end of seven years,and assuming the company's discount rate is 10%,what is the purchase price of the machine if the net present value of the investment is $170,000? (Ignore income taxes in this problem.)

Question

Quizplus · Accepted Answer

To calculate the purchase price of the machine, we need to use the formula for calculating net present value:

NPV = (Cash inflows / (1 + discount rate)^n) - Purchase price

Where:

Cash inflows = $90,000 per year 
Discount rate = 10% 
n = number of years (in this case, 7)

We know that the net present value of the investment is $170,000. So, we can plug in the values and solve for the purchase price:

$170,000 = ($90,000 / (1+0.10)^1) 
+ ($90,000 / (1+0.10)^2) 
+ ($90,000 / (1+0.10)^3) 
+ ($90,000 / (1+0.10)^4) 
+ ($90,000 / (1+0.10)^5) 
+ ($90,000 / (1+0.10)^6) 
+ ($90,000 / (1+0.10)^7) - Purchase price

Solving for purchase price, we get:

Purchase price = $268,120

Stratford Company Purchased a Machine with an Estimated Useful Life