Question

Butler Corporation is considerIng the purchase of new equipment costing $81,000. The projected annual after-tax net income from the equipment is $2,900, after deducting $27,000 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 10% return on its investments. The present value of an annuity of 1 for different periods follow:
Periods 10 Percent
1 0.9091
2 1.7355
3 2.4869
4 3.1699
What is the net present value of the machine?
a. $8,700
b. $74,358
c. $81000
d. $(6,642)

Answer 1

Answer:

d. $(6,642)

Explanation:

The present value is the sum of after tax cash flows.

Present value can be calculated using a financial calculator

Cash flow in year 0 = $-81,000

Cash flow each year in year 1 to 3 = $27,000 + $2,900 = $29,900

I = 10%

Present value = $(6,642)

To find the PV using a financial calacutor:

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

I hope my answer helps you