A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of 1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%?
A) $118,855
B) $583,676
C) $629,788
D) $705,391
E) $1,918,855

Question

Quizplus · Accepted Answer

The net present value of the cash flows from the investment, discounted at 12%, is $118,855. This is calculated as follows:NPV = -Initial Investment + Sum of Present Values of Future Cash FlowsNPV = -$1,800,000 + ($200,000 x 0.8929) + ($200,000 x 0.7972) + ($200,000 x 0.7118) + $30,000NPV = -$1,800,000 + $178,580 + $159,440 + $142,360 + $30,000NPV = $118,855

A Company Can Buy a Machine That Is Expected to Have