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Annual After Tax Cash Flow; Net Present Value of Purchase

Use the following to answer questions 1-2:
Paige, Inc. is considering the purchase of a new machine costing $480,000. The machine's useful life is expected to be 8 years with no salvage value. The straight-line depreciation method will be used. The net increase in annual after tax cash flow is expected to be $110,000. Paige estimates its cost of capital to be 14%. (The present value of a $1 annuity for 8 years at 14% is $4.639n, and the present value of $1 to be received in 8 years is $0.351

1. Refer to the information above. The net present value of the machine
under consideration is:
a. $40,520.
b. $30,290.
c. $60,480.
d. $75,160.

2. Refer to the information above. Upper level managers at Paige Inc. are concerned that employee estimates of future cash flows from the new machine may be overly optimistic. To what dollar amount can the annual after tax cash flow fall before the investment in the new machine should be rejected?
a. $480,000.
b. $124,584.
c. $75,262.
d. $103,471.

Thank You

Solution Preview

1. The annual after tax cash flows are given as $110,000. Since the value remains the same, this is an annuity. The present value of an annuity is found by multiplying the annuity value with the annuity factor. The annuity factor given here is 4.639 ( ...

Solution Summary

The solution explains the calculation of NPV