Question

Syth Corporation is considering purchasing a new machine. The machine is expected to have a life of six years. Syth estimates that the machine will bring in $4,000 of additional revenue each year and will cost $1,500 each year to operate. Syth Corporation can earn an interest rate of 6% on its funds, so this is considered the appropriate discount rate to use for capital budgeting decisions. What is the most that Syth Corporation should be willing to pay for this equipment today? $__________

Answer #1

Cash flow= Additional revenue - Cost | |||||||

Cash flow= $ 4000- $ 1500 | |||||||

Cash Flow= $ 2500 | |||||||

Since No Tax rate is Given in question CFBT= CFAT | |||||||

Year |
CFAT A ($) |
PV Factor B 6% |
Present Value A * B ($) |
||||

1 | 2500 | 0.9434 | 2358.5 | ||||

2 | 2500 | 0.8900 | 2225 | ||||

3 | 2500 | 0.8396 | 2099 | ||||

4 | 2500 | 0.7921 | 1980.25 | ||||

5 | 2500 | 0.7473 | 1868.25 | ||||

6 | 2500 | 0.705 | 1762.5 | ||||

TotaPresent value of Cash inflow | 12293.5 | ||||||

TotaPresent value of Cash inflow so if equipment cost is max $ 12293.5 Syth Corporation will not bear any loss their for Syth Corporation Should willing to pay max $ 12293.5 for brekeeven NPV | |||||||

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