Question

Butler Corporation is considering the purchase of new equipment costing $36,000. The projected annual after-tax net income from the equipment is $1,400, after deducting $12,000 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 follows: Periods 10% 1 0.9091 2 1.7355 3 2.4869 4 3.1699 What is the net present value of the machine?

Answer 1

Answer:

Net Present Value = $33,324.46 - $36,000 = - $2,675.54

Explanation:

Cost of new project = $36,000

Cash inflow from the project = $1,400 + $12,000 = $13,400

Calculating net cash inflow we consider the cash inflow for this depreciation is added back as depreciation does not involve cash outflow

Life of the machine = 3 years

Return on investment = 10%

Present value interest factor cumulative 3 years = 2.4869

Present value of cash inflow = $13,400 $\times$ 2.4869 = $33,324.46

Present value of cash outflow = $36,000

Net Present Value = Cash Inflow - Cash outflow = $33,324.46 - $36,000 = - $2,675.54

Since, net present value is negative the project shall not be accepted.