Question

Steven Googal owns a garage and is contemplating purchasing a tire retreading machine for $18,500. After estimating costs and revenues, Steven projects a net cash inflow from the retreading machine of $4,070 annually for 9 years. Steven hopes to earn a return of 11% on such investments. What is the present value of the retreading operation? Should Steven Googal purchase the retreading machine? (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (Round answer to 2 decimal places, e.g. 15.25.)

Answer 1

ANSWER

Annual cash flows	4,070
X PV factor (11%,9 years)	6.20652	=(1-(1.11)^-9)/0.11
Present value of the retreading operation	25,260.5364

Yes the company shall purchase the machine since it will result in to a positive net present value of

= $ 25,260.5364 - $ 18,500

= $ 6,760.53 Approximately

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