Question

The following present value factors are provided for use in this problem.

Periods	Present Value of $1 at 10%			Present Value of an Annuity of $1 at 10%
1		0.9091			0.9091
2		0.8264			1.7355
3		0.7513			2.4869
4		0.6830			3.1699

Cliff Co. wants to purchase a machine for $64,000, but needs to earn an 10% return. The expected year-end net cash flows are $25,000 in each of the first three years, and $29,000 in the fourth year. What is the machine's net present value?

Multiple Choice

$17,980.

$104,000.

$81,980.

$(44,193).

$(1,827).

Answer 1

• All working forms part of the answer
• Net Present value = Sum of present values of future cash inflow – Total outflow or initial investment
• Working

Year		Amount	PV of $ 1 at 10%	PV of Annuity of $ 1 at 10%	Present Values
1 to 3	Year end Net Cash Flows	$                25,000		2.4869	$          62,173
Year 4	Year end Net Cash Flows	$                29,000	0.683		$          19,807
	Sum of present Values of Cash Flows				$          81,980
	Purchase cost of machine				$        (64,000)
	Net present Value				$          17,980

• Answer = Option #1: $ 17,980 = NPV