Question

Vextra corporation is considering the purchase of new equipment costing $44,500. the projected annual cash inflow is $12,900, to be received at the end of each year. the machine has a useful life of 4 years and no salvage value. vextra requires a 12% return on its investments. the present value of an annuity of $1 for different periods follows: periods 12% 1 0.8929 2 1.6901 3 2.4018 4 3.0373 what is the net present value of the machine?

Answer 1

Net present value is
Present value of annual cash flows-project investment

Net present value
12,900×3.0373−44,500=(5,319)

Answer 2

Answer: ($5,318.83)

Explanation:

Net present value is the difference between the present value of cash inflows and the present value of cash outflows resulting from the project.

Types of Cash flows

1. Annuity: where payments last for a certain period

2. Perpetuity: whereas for perpetuity, they continue indefinitely

The only difference between annuity and perpetuity is the ending period.

In case of Annuity, Present value of cash inflows will be calculated as follows:

Present value = Annual Cash Inflow x Relevant Annuity Factor

                       = $12,900 x 3.0373

                       = $39,181.17

Net Present Value = Present Value of Cash Inflow - Initial Investment

                               = $39,181.17 - $44,500

                               = (5,318.83)

If present value of cash inflow is less than present value of cash outflow, the net present value is said to be negative and the investment proposal is rejected.