(Ignore income taxes in this problem.) Stratford Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of $90,000 each year over the next seven years. If the machine has no salvage value at the end of seven years, and assuming the company's discount rate is 10%, what is the purchase price of the machine if the net present value of the investment is $170,000?

Question

Quizplus · Accepted Answer

Using the formula for net present value:
NPV = present value of cash inflows - purchase price

We know the net present value is $170,000 and the cash inflows are $90,000 per year for seven years. Plugging this into a present value table, the total present value of the cash inflows is $486,580.

We can then solve for the purchase price:
$170,000 = $486,580 - purchase price

Purchase price = $486,580 - $170,000
Purchase price = $316,580

Therefore, the purchase price of the machine is $316,580.

However, the answer choices are not in dollar amounts, so we need to plug in the options to see which one is closest to $316,580.

Plugging in option C:
Purchase price = $268,120
NPV = $486,580 - $268,120 = $218,460
This is the closest to the net present value we calculated, so the answer is C.

(Ignore Income Taxes in This Problem