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A company is considering the purchase of new equipment for $69,000. The projected annual net cash flows are $27,800. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 9% return on investment. The present value of an annuity of $1 for various periods follows: Period Present value of an annuity of $1 at 9% 1 0.9174 2 1.7591 3 2.5313 What is the net present value of this machine assuming all cash flows occur at year-end?

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Answer:

The correct answer is $1,370

Explanation:

The computation of net present value is shown below:-

For computing the net present value first we need to find out the present value of inflow

Present Value of Inflow of 3 Years at 9% = Net cash flow × Number of years

= $27,800 × 2.5313

= $70,370

Net Present Value = Present value of inflow - Initial Outflow

= $70,370 - $69,000

= $1,370

Therefore for computing the net present value we simply deduct the initial outflow from present value of inflow.

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