Question

Butler corporation is considering the purchase of new equipment costing $30,000. the projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 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:

Answer 1

Answer:

-$3,099.49

Explanation:

cash flow year 0 = -$30,000

cash flow year 1 = $10,000 + $1,200 = $11,200

cash flow year 2 = $10,000 + $1,200 = $11,200

cash flow year 3 = $10,000 + $1,200 = $11,200

discount rate = 12%

net present value = -$30,000 + ($11,200 / 1.12) + ($11,200 / 1.12²) + ($11,200 / 1.12³) = -$30,000 + $10,000 + $8,928.57 + $7,971.94 = -$3,099.49

Answer 2

Net annual cash flows
1,200+10,000=11,200

Net present value is
PV of annual cash flows-project investment
11,200×2.4018−30,000=(3,100)