Question

Michaels, Inc., purchased a machine for $75,000. The machine has a useful life of five years and no salvage value. Straight-line depreciation is to be used. The machine is expected to generate cash flow from operations, net of income taxes, of $25,000 in each of the five years. Michaels' expected rate of return is 10%. Information on present value factors is as follows:
Period Present Value of $1 at 10% Present value of ordinary annuity of $1 at 10%
1 0.90909 0.90909
2 0.82645 1.73554
3 0.75132 2.48685
4 0.68301 3.16986
5 0.62092 3.79079

What would be the net present value?
Please provide step by step explications.
Thanks!

Answer 1

Answer:

$19,769.75

Step-by-step explanation:

The net present value of the machine is the present value of cash inflows minus the initial cost of the machine of $75,000.

The present value of the cash inflows states the future cash flows in today's equivalence by multiplying each year's cash inflows by its discounting factor(the present value of ordinary annuity of $1 of 10% for 5 years which is 3.79079)

net present value=($25,000*3.79079)-$75,000

                             =$94,769.75 -$75,000=$19,769.75