Butler Corporation is considering the purchase of new equipment costing $84,000. The projected annual after-tax net income from the equipment is $3,000, after deducting $28,000 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 | Percent

1 | 0.9174

2 | 1.7591

3 | 2.5313

4 | 3.2397

What is the net present value of the machine? (closest to)

- $5,529.70

Explanation:

The computation of the Net present value is shown below

= Present value of all yearly cash inflows after applying discount factor - initial investment

where,

The Initial investment is $84,000

And, the after tax net income would be

= Projected annual after-tax net income + depreciation expenses

= $3,000 + $28,000

= $31,000

Now the present value after applying the present value of an annuity for 3 years would be

= $31,000 * 2.5313

= $78,470.3

Now put these values to the above formula

So, the value would equal to

= $78,470.3 - $84,000

= - $5,529.70

The net present value of the machine is $5530

Explanation:

Data provided in the question:

Cost of the equipment = $84,000

Annual after-tax net income from the equipment after deducting depreciation = $3,000

Depreciation = $28,000

Useful life = 3 years

Required return on investment = 9% = 0.09

Now,

After-tax cash flow = After-tax net income + Depreciation

= $3,000 + $28,000

= $31,000

Therefore,

Net Present Value = Present value of cash flow - Investment

= ($31,000 * PVIFA (11%, 3)) - $84,000

= ($31,000 * 2.5313) - $84,000

= $78470.3 - $84,000

= - $5529.7 ≈ - $5530

hence,

The net present value of the machine is $5530