Butler Corporation is considering the purchase of new equipm

Butler Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 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 12% return on its investments. The present value of an annuity of $1 for different periods follows: Periods 12% 0.8929 1.6901 2.4018 3.0373 What is the net present value of the machine?

Solution

Since the cash flows are equal each year, we will use annuity factor table and the appropriate value of annuity factor will be of 3 years as the machine is to be used for 3 years

Net cash flows each year

= Projected annual after-tax net income + Depreciation

= $1,200 + $10,000

= $11,200 each year

Depreciation is added to calculate net cash flows as depreciation is a non-cash expense and is to be added to calculate the cash generated from the equipment so that Net Present Value of the equipment can be calculated

Total value of inflows in 3 years

= Net cash flows each year x Annuity factor of 3 years

= $11,200 x 2.4018

= $ 26,900

So, Net Present value

= Present value of inflows - Cash outflow

= $26,900 - $30,000

= $(3,100)

So, as per above calculations, option D is the correct option