Question

The management of Salem Corporation is considering the purchase of equipment costing $109,000, which has an estimated life of 3 years and no salvage value. The net after tax cash flow from the project for each of the three years is expected to be $45,000. The company's cost of capital is 10%. Compute the net present value of the equipment. (Present value of $1 due in three years, discounted at 10%, is 0.751; present value of $1 received annually for three years, discounted at 10%, is 2.487).
A. $3,616.
B. $2,548.
C. $2,915.
D. $3,213.

Answer 1

Answer:

Net present value of the equipment =  $2,915

Explanation:

Given:

Equipment cost = $109,000

Estimated life = 3 years

Annual cash flow = $45,000

Discounted rate = 10% (3 year discount factor = 2.487)

Find:

Net present value of the equipment = ?

Computation:

Net present value of the equipment = Present value of Annual cash flow - Equipment cost

Net present value of the equipment =  [Annual cash flow × discount factor] - Equipment cost

Net present value of the equipment =  [$45,000 × 2.487] - $109,000

Net present value of the equipment =  $111,915 - $109,000

Net present value of the equipment =  $2,915