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?
A) $(1,768)
B) $3,000
C) $15,000
D) $18,000
E) $43,232

Question

Quizplus · Accepted Answer

To calculate net present value (NPV), we need to find the present value (PV) of all the cash inflows and outflows, and then subtract the initial investment.

The cash inflows are the after-tax net income plus depreciation, which is $3,000 + $15,000 = $18,000 per year for 3 years, or $54,000 in total.

To find the present value of this annuity, we can use the PVIFA table provided. For a 12% return and a 3-year period, the PVIFA is 2.4018. Multiplying this by the annual cash inflow of $18,000 gives a present value of $43,237.

Subtracting the initial investment of $45,000 gives a net present value of -$1,763. Rounded to the nearest dollar, the answer is (A) $(1,768).

Therefore, choice A is the correct answer.

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