A company is considering the purchase of new equipment for $45,000. The projected after-tax net income is $3,000 after deducting $15,000 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: 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 after-tax net income is $3,000 after deducting $15,000 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:  What is the net present value of this machine assuming all cash flows occur at year-end?

Quizplus · Accepted Answer

First, we need to calculate the annual net cash flows after subtracting the depreciation expense, which is $3,000 + $15,000 = $18,000 per year.
Then we need to use the present value of an annuity table to find the present value factor for a 3-year annuity at 12%, which is 2.4018. Multiplying the factor by the annual net cash flow gives us a present value of $43,233.60.
Finally, we need to subtract the initial cost of $45,000 from the present value to get the net present value of -$1,766.40, which is rounded to -$1,768 in answer choice A. Therefore, the company should not purchase this machine as it has negative net present value.

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