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27 July, 13:41

MC Qu. 104 Butler Corporation is considering ... Butler Corporation is considering the purchase of new equipment costing $69,000. The projected annual after-tax net income from the equipment is $2,500, after deducting $23,000 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 9% return on its investments. The present value of an annuity of $1 for different periods follows: Periods 9% 1 0.9174 2 1.7591 3 2.5313 4 3.2397 What is the net present value of the machine?

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  1. 27 July, 14:05
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    NPV ($4,452)

    Explanation:

    The net present value of the investment made can be calculated as under:

    NPV = (Annual Net Cash inflow * Annuity Factor at 9% for 3 years) - Initial investment

    Here

    Initial investment is $69,000

    The depreciation is the non cash item which must be removed so the annual cash inflow would be:

    Annual Net Cash inflow = $2,500 + $23,000 Non cash item = $25,500

    The annuity factor at 9% for three years is given and is 2.5313

    So putting above value in the equation, we have:

    Net Present Value = ($25,500 * 2.5313) - $69,000

    Net Present Value = $64,548 - $69,000

    Net Present Value = ($4,452)
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