Question

Vextra Corporation is considering the purchase of new equipment costing $43,500. The projected annual cash inflow is $12,700, 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:

Answer 1

Answer:

Year Cashflow DF@12%    PV

               $        $

1                  12,700            0.8929   11,339

2                 12,700            0.7972    10,124

3                 12,700            0.7118       9,040

4                 12,700            0.6355      8,071

                  Present value of annuity  38,574

Explanation:

In this case, there is need to discount the cashflow for each year at 12%. then, we will add the present values of cashflows in order to obtain the present value of annuity.