MC Qu. 112 A company is considering ... A company is considering the purchase of new equipment for $105,000. The projected annual net cash flows are $41,000. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 8% return on investment. The present value of an annuity of $1 for various periods follows: Period Present value of an annuity of $1 at 8% 1 0.9259 2 1.7833 3 2.5771 What is the net present value of this machine assuming all cash flows occur at year-end

Net Present Value = $660.98

Explanation:

The Net present value (NPV) is the difference between the Present value (PV) of cash inflows and the PV of cash outflows. A positive NPV implies a good and profitable investment project and a negative figure implies the opposite.

NPV of an investment:

NPV = PV of Cash inflows - PV of cash outflow

PV of cash inflow = A * (1 - (1+r) ^ (-n)) / r

A - annul cash inflow, r - 8%, n - 3

PV of cash inflow = 41,000 * (1 - 1.08^ (-3)) / 0.08

= 105,660.98

Initial cost = 105,000

NPV = 105,660.98 - 105,000

= $ 660.98