A company is considering the purchase of new equipment for $39,000.The projected after-tax net income is $6,000 after deducting $13,000 of depreciation.The machine has a useful life of three years and no salvage value.Management of the company requires a 12% return on investment.The present value of an annuity of 1 for various periods follows:
$\begin{array}{lc}
& \text { Present Value of an }\
\underline { \text { Period }}& \underline { \text { Annuity of 1 at 12 \% }}\
1 & 0.8929 \
2 & 1.6901 \
3 & 24018
\end{array}$ Required:
a.What is the net present value of this machine assuming all cash flows occur at year-end?
b.What is the profitability index for this equipment?

Question

A company is considering the purchase of new equipment for $39,000.The projected after-tax net income is $6,000 after deducting $13,000 of depreciation.The machine has a useful life of three years and no salvage value.Management of the company requires a 12% return on investment.The present value of an annuity of 1 for various periods follows:
 $\begin{array}{lc}
& \text { Present Value of an }\
 \underline { \text { Period }}& \underline { \text { Annuity of 1 at  12 \%  }}\
1 & 0.8929 \
2 & 1.6901 \
3 & 24018
\end{array}$ Required:
a.What is the net present value of this machine assuming all cash flows occur at year-end?
b.What is the profitability index for this equipment?

Quizplus · Accepted Answer

The Answer of A company is considering the purchase of new equipment for $39,000.The projected after-tax net income is $6,000 after deducting $13,000 of depreciation.The machine has a useful life of three years and no salvage value.Management of the company requires a 12% return on investment.The present value of an annuity of 1 for various periods follows:
 $\begin{array}{lc}
& \text { Present Value of an }\
 \underline { \text { Period }}& \underline { \text { Annuity of 1 at  12 \%  }}\
1 & 0.8929 \
2 & 1.6901 \
3 & 24018
\end{array}$ Required:
a.What is the net present value of this machine assuming all cash flows occur at year-end?
b.What is the profitability index for this equipment?

A Company Is Considering the Purchase of New Equipment for $39,000.The