A-15 Compute Net Present Value: Compare to Accounting Income Lucas Company is co
ID: 2429695 • Letter: A
Question
A-15 Compute Net Present Value: Compare to Accounting Income Lucas Company is considering investing in a new machine. The machine costs $12,000 and has an economic life of four years. The machine will generate cash flows of $3,500 (cash revenues less cash expenses) each year. All cash flows, except for the initial investment, are realized at the end of the year. The investment in the machine will be made at the beginning of the first year. Lucas is not subject to any taxes and, for financial accounting purposes, will depreciate the machine using straight-line depreciation over four years. Lucas uses a 8 percent cost of capital when evaluating investments. Use Exhibit A9 a. Calculate the accounting income for the total over four years b. Compute the NPV of the cash nlows over four years (Round PV factor to 3 decimal places. Negative amount should be indicated by a minus sign)Explanation / Answer
Answer
a.
Depreciation per year = Cost / Useful life
= $12,000 / 4 Years
= $3,000 per year
Accounting Income = Cash Flow/Income – Non Cash Expense (Depreciation)
= $3,500 – 3,000
= $500 per year
Total Accounting Income = $500 per year * 4 Years
Total Accounting Income = $2,000
b.
Depreciation will not be considered as it is non-cash expense.
PVAF @8% for 4 years = 3.312
Present value of Cash Inflow = PVAF @8% for 4 years * Cash Inflow per year
= 3.312 * $3,500
Present value of Cash Inflow = $11,592
NPV = Present value of Cash Inflow – Initial Cash Outflow
= $11,592 – 12,000
NPV = ($408)
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