Question

Butler Corporation is considering the purchase of new equipment costing $84,000. The projected annual after-tax net income from the equipment is $3,000, after deducting $28,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Butler requires a 9% return on its investments. The present value of an annuity of 1 for different periods follows:

Periods 9 | Percent
1 | 0.9174
2 | 1.7591
3 | 2.5313
4 | 3.2397

What is the net present value of the machine? (closest to)

Answer 1

Answer:

The net present value of the machine is $5530

Explanation:

Data provided in the question:

Cost of the equipment = $84,000

Annual after-tax net income from the equipment after deducting depreciation = $3,000

Depreciation = $28,000

Useful life = 3 years

Required return on investment = 9% = 0.09

Now,

After-tax cash flow = After-tax net income + Depreciation

= $3,000 + $28,000

= $31,000

Therefore,

Net Present Value = Present value of cash flow - Investment

= ( $31,000 × PVIFA(11%, 3) ) - $84,000

= ( $31,000 × 2.5313 ) - $84,000

= $78470.3 - $84,000

= -$5529.7 ≈ - $5530

hence,

The net present value of the machine is $5530

Answer 2

Answer:

- $5,529.70

Explanation:

The computation of the Net present value is shown below

= Present value of all yearly cash inflows after applying discount factor - initial investment

where,

The Initial investment is $84,000

And, the after tax net income would be

= Projected annual after-tax net income + depreciation expenses

= $3,000 + $28,000

= $31,000

Now the present value after applying the present value of an annuity for 3 years would be

= $31,000 ×  2.5313

= $78,470.3

Now put these values to the above formula  

So, the value would equal to

= $78,470.3 -  $84,000

= - $5,529.70