The management of Salem Corporation is considering the purchase of equipment costing $109,000,which has an estimated life of 3 years and no salvage value.The net after tax cash flow from the project for each of the three years is expected to be $45,000.The company's cost of capital is 10%.Compute the net present value of the equipment.(Present value of $1 due in three years,discounted at 10%,is 0.751;present value of $1 received annually for three years,discounted at 10% is 2.487. )

Question

Quizplus · Accepted Answer

First, we need to calculate the total after-tax cash flow from the project, which is $45,000 per year for three years, or $135,000 in total.

Next, we need to calculate the present value of the cash flows. Using the given discount rate of 10% and the present value factors provided, we can calculate the present value of $1 received annually for three years as 2.487.

PV factor = 1 / (1 + 10%)^n, where n is the number of years

So, the present value of the cash flows is:

PV = $45,000 x 2.487 = $111,915

Finally, we need to subtract the initial cost of the equipment, $109,000, from the present value of the cash flows to get the net present value (NPV):

NPV = $111,915 - $109,000 = $2,915

Therefore, the net present value of the equipment is $2,915, making choice C the best answer.

The Management of Salem Corporation Is Considering the Purchase of Equipment