Question

Poe Company is considering the purchase of new equipment costing $90,000. The projected net cash flows are $45,000 for the first two years and $40,000 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.

Answer 1

Answer:

NPV = $45,472.30

Explanation:

The NPV is the difference between the PV of cash inflows and the PV of cash outflows. A positive NPV implies a good investment decision and a negative figure implies the opposite.  

NPV of an investment:  

NPV = PV of Cash inflows - PV of cash outflow  

PV of cash inflows = 45,000  ×1 .1^(-1) +  45,000 × 1.1^(-2) +  40,000 × 1.1^(-3) +  40,000 × 1.1^(-4)= 135,472.3038

Initial cost = 90,000

NPV = 135,472.3038  - 90,000 =$45,472.3038

NPV = $45,472.30