Homework Sourse34 Poe Company is considering the purchase of new equipment
34.
Poe Company is considering the purchase of new equipment costing $81,000. The projected net cash flows are $36,000 for the first two years and $31,000 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 an annuity of 1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine.
$(17,901).
$(6,707).
$17,901.
$6,707.
$25,944.
| Periods | Present Valueof 1 at 10% | Present Value of anAnnuity of 1 at 10% |
| 1 | 0.9091 | 0.9091 |
| 2 | 0.8264 | 1.7355 |
| 3 | 0.7513 | 2.4869 |
| 4 | 0.6830 | 3.1699 |
Solution
So, as we can find, the Net Present Value is $25,944 and the last option is the correct option.
| Years | 0 | 1 | 2 | 3 | 4 | |
| A | Initial Cost | -81000 | ||||
| B | Cash Flows | 36000 | 36000 | 31000 | 31000 | |
| C = A + B | Net Cash Flows | -81000 | 36000 | 36000 | 31000 | 31000 |
| D | PV factor @10% | 1 | 0.9091 | 0.8264 | 0.7513 | 0.683 |
| E = C x D | Present Value | -81000 | 32727.6 | 29750.4 | 23290.3 | 21173 |
| F = Sum E | Net Present Value | 25941.3 |
