Question

Butler Corporation is considering the purchase of new equipment costing $45,000. The projected annual after-tax net income from the equipment is $1,700, after deducting $15,000 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 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

Answer:

-$4,889.94

Explanation:

The computation of the net present value is shown below:  

Net present value = Present value after considering the depreciation and discounting factor - initial investment

where

Present value is

= After-tax net income + Depreciation expense

= $1,700 + $15,000

= $16,700

And its discounting factor is 2.4018

So, the present value is

= $16,700 × 2.4018

= $40,110.06

And, the initial investment is $45,000

So, the net present value is

= $40,110.06 - $45,000

= -$4,889.94