Question

Butler Corporation is considering the purchase of new equipment costing $45,000. The projected annual after-tax net income from the equipment is $1,700, after deducting $15,000 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 12% return on its investments. The present value of an annuity of 1 for different periods follows: Periods 12 Percent 1 0.8929 2 1.6901 3 2.4018 4 3.0373What is the net present value of the machine?a. $45,000. b. $(4,890). c. $36,027. d. $5,100. e. $40,110.

Answer 1

Answer:

The correct answer is b. $(4,890).

Explanation:

The net present value is calculated by discounting all relevant cashflows. Detail calculation is given below.

NPV = -45,000 + (1,700+15,000)* Annuity factor

NPV =  ($ 4,890)

Annuity factor = (1- (1+12%)^-3)/12%= 2.402