Question

MC Qu. 104 Butler Corporation is considering... Butler Corporation is considering the purchase of new equipment costing $69,000. The projected annual after-tax net income from the equipment is $2,500, after deducting $23,000 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 9% return on its investments. The present value of an annuity of $1 for different periods follows: Periods 9% 1 0.9174 2 1.7591 3 2.5313 4 3.2397 What is the net present value of the machine?

Answer 1

Answer:

NPV ($4,452)

Explanation:

The net present value of the investment made can be calculated as under:

NPV = (Annual Net Cash inflow * Annuity Factor at 9% for 3 years)    - Initial investment

Here

Initial investment is $69,000

The depreciation is the non cash item which must be removed so the annual cash inflow would be:

Annual Net Cash inflow = $2,500 + $23,000 Non cash item = $25,500

The annuity factor at 9% for three years is given and is 2.5313

So putting above value in the equation, we have:

Net Present Value = ($25,500 * 2.5313)      -   $69,000

Net Present Value =  $64,548       - $69,000

Net Present Value = ($4,452)