Question

Poe Company is considering the purchase of new equipment costing $87,500. The projected net cash flows are $42,500 for the first two years and $37,500 for years three and four. The revenue is to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of $1 and present value of an annuity of $1 for different periods is presented below. Compute the net present value of the machine.

Answer 1

Answer:

$40,047.64

Explanation:

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

NPV can be calculated using a financial calculator

Cash flow in year 0 = $-87,500

Cash flow in year 1 and 2 = $42,500

Cash flow in year 3 and 4 = $37,500

I = 10%

NPV = $40,047.64

To find the NPV 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