Question

Barney Googal owns a garage and is contemplating purchasing a tire retreading machine for $19,820. After estimating costs and revenues, Barney projects a net cash inflow from the retreading machine of $4,600 annually for 6 years. Barney hopes to earn a return of 9% on such investments.

Click here to view the factor table.

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

What is the present value of the retreading operation? (Round answer to 2 decimal places, e.g. 25.25.)

Present value

$

Should Barney Googal purchase the retreading machine?

Barney Googal

should not/ should

purchase the retreading machine.

Answer 1

present value of annuity factor = [1 -(1+r)^(-n)]/r

here,

r=9%

=>0.09.

n= 6 years.

=>[1-(1.09)^(-6)]/0.09

=>0.4037327 /0.09

=>4.48592.

present value of cash inflows = annual cash inflows * Present value of annuity factor

=>$4600*4.48592

=>$20,635.23.

present value = present value of cash inflows - present value of cash outflows

=>$20,635.23 - 19,820

=>$815.23.

Should you purchase the retreading machine.

Barney Googal should purchase the retreading machine.