Question

Englestone, Inc. recently invested in an asset with a purchase cost of $123,000. Net annual cash flows from the asset were $25,000, and the net present value was $2,825. Find the approximate useful life of the asset in years, assuming a 9% minimum desired rate of return.

Answer 1

Answer: 7 years

Calculations:

Present value of net annual cash flows - Initial investment = Net present value

[$25,000 x Present value annuity factor (9%, n years)] - $123,000 = $2,825

[$25,000 x Present value annuity factor (9%, n years)] = $2,825 + $123,000

[$25,000 x Present value annuity factor (9%, n years)] = $125,825

Present value annuity factor (9%, n years) = $125,825 ÷ $25,000

Present value annuity factor (9%, n years) = 5.033

In the present value annuity table this '5.033' is matched at 9% for '7 years'.

Therefore, The useful life of the asset is 7 Years.