Question

The Whitton Company uses a discount rate of 16%. The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years. The machine would have no salvage value. The net present value of this machine to the nearest whole dollar is:
a. $22,460.
b. $4,460.
c. $(9,980).
d. $12,000.

Answer 1

The net present value of the machine to nearest whole dollar is $22,460.

What is net present value?

A series of cash flows that take place at various points in time are covered by the net present value (NPV). The amount of time until a cash flow is expected determines its present value. The discount rate also plays a role. The temporal value of money is accounted for by NPV. It offers a tool for assessing and contrasting capital projects or financial products with cash flows distributed over time, such as loans, investments, insurance contract payouts, and many more applications. Because a present flow may be invested right away and start earning returns, unlike a future flow, it is more useful to have a present flow than a similar one in the future.

Net present value=10,000+12460=$22,460

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