Question

Poe Company is considering the purchase of new equipment costing $80,000. The projected net cash flows are $35,000 for the first two years and $30,000 for years three and four. The revenue is to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of $1 and present value of an annuity of $1 for different periods is presented below. Compute the net present value of the machine. PeriodsPresent Valueof $1 at 10%Present Value of anAnnuity of $1 at 10%1 0.9091 0.9091 2 0.8264 1.7355 3 0.7514 2.4869 4 0.6830 3.1699 Multiple Choice$15,731.$4,896.$(15,731).$23,775.$(4,896).

Answer 1

Answer:

Net Present Value = $23,775

Explanation:

Year Cash flow PV factor at 10% Present value

0         ($80,000) 1.0000                   ($80,000)

1         $35,000                  0.9091                    $31,818  

2         $35,000                 0.8264                    $28,924  

3         $30,000                 0.7514                    $22,542  

4         $30,000                 0.6830                   $20,490  

                                              NPV                   $23,775  

Net Present value = Sum of all present values from t=0 to t=n = $23,775