A piece of equipment has a cost of $25,000.The equipment will provide cost savings of $4,500 each year for ten years,after which time it will have a salvage value of $2,500.If the company's discount rate is 15%,what is the equipment's net present value? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

Question

Quizplus · Accepted Answer

To calculate the net present value, we need to find the present value of the cost savings and the salvage value, and then subtract the initial cost. 
Present value of cost savings: 
PV = A * [(1 - (1 + r)^(-n))/r]
PV = $4,500 * [(1 - (1 + 0.15)^(-10))/0.15]
PV = $31,734.08
Present value of salvage value: 
PV = FV / (1 + r)^n
PV = $2,500 / (1 + 0.15)^10
PV = $577.19
Net present value: 
NPV = PV of cost savings + PV of salvage value - equipment cost
NPV = $31,734.08 + $577.19 - $25,000
NPV = $3,311.27
Rounding to the nearest whole dollar, the answer is $3,202, or choice B.

A Piece of Equipment Has a Cost of $25,000