Question

Vextra Corporation is considering the purchase of new equipment costing $38,000. The projected annual cash inflow is $11,600, 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 (rounded to the nearest whole dollar)?

a. $(35,233).
b. $(2,767).
c. $38,000.
d. $(3,700).
e. $5,233.

Answer 1

Answer:

b

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.  

When choosing between positive NPV projects, choose the project with the highest NPV first because it is the most profitable.

NPV can be calculated using a financial calculator  

Cash flow in year 0 = $-38,000.

Cash flow in year 1 - 4 = $11,600

I = 12%

NPV = $(2,767).

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute