A company is considering the purchase of new equipment for $45,000. The projected annual net cash flows are $19,000. The machine has a useful life of 3 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:
$\begin{array} { l c }
\text { Period } & \text { Present value of an annuity of } 1 \text { at } 12 \% \
\hline 1 & 0.8929 \
3 & 1.6901 \
3 & 2.4018
\end{array}$
What is the net present value of this machine assuming all cash flows occur at year-end?

Question

A company is considering the purchase of new equipment for $45,000. The projected annual net cash flows are $19,000. The machine has a useful life of 3 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:  
$\begin{array} { l c } 
\text { Period } & \text { Present value of an annuity of } 1 \text { at } 12 \% \
\hline 1 & 0.8929 \
3 & 1.6901 \
3 & 2.4018
\end{array}$ 
What is the net present value of this machine assuming all cash flows occur at year-end?

Quizplus · Accepted Answer

The net present value (NPV) is calculated by multiplying the annual cash flow by the present value of an annuity factor for 3 years at 12%, then subtracting the initial investment: $NPV = (19,000 \times 2.4018) - 45,000 = 45,634 - 45,000 = 634$.

A Company Is Considering the Purchase of New Equipment for $45,000