Question

Butler Corporation is considering the purchase of new equipment costing $36,000. The projected annual after-tax net...

Butler Corporation is considering the purchase of new equipment costing $36,000. The projected annual after-tax net income from the equipment is $1,400, after deducting $12,000 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 10% return on its investments. The present value of an annuity of $1 for different periods follows:

Periods 10%
1 0.9091
2 1.7355
3 2.4869
4 3.1699


What is the net present value of the machine?

Multiple Choice

  • $36,000.

  • $33,324.

  • $29,843.

  • $4,200.

  • $(2,676).

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Homework Answers

Answer #1

Annual net income = $1,400

Annual depreciation = $12,000

Annual cash inflow = Annual net income+Annual depreciation

= 1,400+12,000

= $13,400

Present value annuity factor (10%,3) = 2.4869

Present value of cash inflow = Annual cash inflow x Present value annuity factor (10%,3)

= 13,400 x 2.4869

= $33,324

Initial investment = $36,000

Net present value =  Present value of cash inflow-Initial investment

= 33,324-36,000

= $(2,676)

The net present value of the machine = $(2,676)

Fifth option is correct.

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