Snyder Company is considering purchasing equipment. The
equipment will produce the following cash inflows: Year 1, $26,500;
Year 2, $29,500; and Year 3, $39,000. Snyder requires a minimum
rate of return of 12%.
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as
displayed in the factor table provided.)
What is the maximum price Snyder should pay for this equipment?
(Round answer to 2 decimal places, e.g.
25.25.)
| Maximum price | $ |
Answer)
Calculation of maximum price that the company will be willing to pay for the equipment
Maximum price to be paid for the equipment will be equal to the present value of Net cash inflows discounted at minimum rate of return (i.e. 12%).
Present value of Net cash inflows:
|
Year |
Net Cash Inflows |
Present value factor at 12% |
Present Value |
|
1 |
$26,500 |
0.89286 |
23,660.79 |
|
2 |
$29,500 |
0.79719 |
23,517.11 |
|
3 |
$39,000 |
0.71178 |
27,759.42 |
|
Total |
74,937.32 |
Therefore the maximum price that the company will be willing to pay for the machine is $ 74,937.32
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