Question

Xavier Co. wants to purchase a machine for $37,000 with a four year life and a $1,000 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $12,000 in each of the four years. What is the machine's net present value (round to the nearest whole dollar)?

Answer 1

The machine's net present value is $3,481. The net present value is a method of calculating the present value of return of an investment either in capital purchases or projects. The net present value amount is acquired by subtracting the $ 37,000 initial investment from the net present value of $12,000 net cash flow for four years plus the present value of $1000 salvage value at the end of the 4th year.

Net Present Value = Present value of net cash flow + Present value of salvage value - Initial investment

$3,481 = $39,746 + $735 - $37,000

Answer 2

Answer:

The answer is $3,481.

Explanation:

We have the net present value of the machine is the sum of present value of the below cash flows discounted at the required rate of return 8%:

Cash outflow at Year 0: Cost of purchasing machine $37,000

4-year annuities from net cash inflow every year: $12,000 each year.

Salvage value recovery at the end of year 4: $1,000.

So the net present value is calculated as below:

-37,000 + (12,000/8%) x [ 1 - (1+8%)^(-4)] + 1,000/(1+8%)^4 = -37,000 + 39,745.52 + 735.03 = $3,480.55

So, the net present value of the machine is $3,841 ( round to the nearest whole dollar).