Daniels Corporation is considering the purchase of new equipment costing $30,000.The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation.The revenue is to be received at the end of each year.The machine has a useful life of three years and no salvage value.Daniels requires a 12% return on its investments.The factors for the present value of $1 for different periods follow: $\begin{array}{lr}
\underline { \text { Periods }} & \underline { \text { 12 Percent }} \
1 & 0.8929 \
2 & 0.7972 \
3 & 0.7118 \
4 & 0.6355
\end{array}$ What is the net present value of the machine?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by finding the present value of the cash flows and subtracting the initial investment. The cash flow each year is $11,200 ($1,200 net income + $10,000 depreciation). The present value of these cash flows over three years at 12% is: $11,200 * (0.8929 + 0.7972 + 0.7118) = $11,200 * 2.4019 = $26,920. Subtracting the initial investment of $30,000 gives an NPV of $(3,080), which is closest to option B.

Daniels Corporation Is Considering the Purchase of New Equipment Costing