Stratford Company purchased a machine with an estimated useful life of seven years.The machine will generate cash inflows of $90,000 each year over the next seven years.If the machine has no salvage value at the end of seven years,and assuming the company's discount rate is 10%,what is the purchase price of the machine if the net present value of the investment is $170,000?
A) $170,000.
B) $221,950.
C) $268,120.
D) $438,120.

Question

Quizplus · Accepted Answer

The purchase price of the machine is the present value of the cash inflows minus the net present value. The present value of the cash inflows is calculated using the formula for the present value of an annuity. The present value of $90,000 per year for seven years at a 10% discount rate is approximately $438,120. Subtracting the net present value of $170,000 gives a purchase price of $268,120.

Stratford Company Purchased a Machine with an Estimated Useful Life