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 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:
(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 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: 
(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 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: 
(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