Question

(LO 10) Poe Company is considering the purchase of new equipment costing $81,000. The projected annual cash inflows are $31,200, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of $1 and present value of an annuity of $1 for different periods is presented below. Compute the net present value of the machine.

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

Multiple Choice

• $6,707.

• $(6,707).

• $(17,901).

• $34,710.

• $17,901.

Answer 1

Computation of Net Present Value
Method-1
Period	Cash flows	Present Value factor	Present Value
0	-81000	1.000	-81,000.00
1	31200	0.909	28,363.92
2	31200	0.826	25,783.68
3	31200	0.751	23,440.56
4	31200	0.683	21,309.60
Net Present Value			17,897.76
Method-2
Period	Cash flows	Present Value factor/Present value annuity factor	Present Value
0	-81000	1.000	-81,000.00
1-4	31200	3.170	98,900.88
Net Present Value			17,901
Note-Since the cash flows for each year same, we can take Present value annuity factor for computing the Present value
Hence the answer is, Option 5-$17,901