Question

butler corporation is considering the purchase of new equipment costing $63,000. the projected annual income from the equipment is $2,300, after deducting $21,000 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 11% return on its investments. the present value of an annuity of $1 for different periods follows: periods 11% 1 0.9009 2 1.7125 3 2.4437 4 3.1024

Answer 1

The correct answer is $(6,062).

Working

Annual cash inflow PV Annuity factor Present value of cash flows

$ 23,300                             2.4437            $      56,938

                                 Less: Initial Investment    $      63,000

                                          Net present value   $      (6,062)

The annual cash flow will be depreciation plus net income because Depreciation is a non-cash expense.

Depreciation is an accounting technique for spreading out the expense of a tangible item over the course of its useful life. How much of an asset's value has been used is shown through depreciation. It enables businesses to purchase assets over a predetermined length of time and generate income from those assets.

The immediate cost of ownership is greatly lowered because businesses do not have to fully account for them in the year the assets are purchased.

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