The Whitton Company uses a discount rate of 15%.The company has an opportunity to buy a machine now for $16,000 that will yield cash inflows of $8,000 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,do not round your intermediate calculations? (Ignore income taxes in this problem.)

Question

Quizplus · Accepted Answer

We can use the formula for calculating the net present value (NPV) of an investment: NPV = - Initial Investment + (Cash flow / (1 + Discount rate) ^ Time period). 
Plugging in the numbers, we get: 
NPV = -$16,000 + ($8,000 / (1 + 0.15) ^ 1) + ($8,000 / (1 + 0.15) ^ 2) + ($8,000 / (1 + 0.15) ^ 3)
NPV = -$16,000 + $6,956 + $6,056 + $5,266
NPV = $2,278 
Therefore, the net present value of the machine is $2,278, which is positive, so it would be a good investment. The best choice is B.

The Whitton Company Uses a Discount Rate of 15