Question

Assume a firm is planning to buy some new equipment. . Pk= $10,500 r = 10%...

Assume a firm is planning to buy some new equipment. .

Pk= $10,500

r = 10%

MRP of the machine = $5,500

Assume the machine has a life span of two years.

Pk is the price if the machine, r is the interest rate, and MRP is the marginal revenue product of the machine.

A) What is the Present Discounted Value of the benefit(MRP) of buying the machine (capital) ? Show your work.

B) What is the Net Present Value ? Show your work.

C) Buy the machine ? Yes or No? Why ?

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Homework Answers

Answer #1

Solution :- (A)

The Present Discounted Value of the benefit (MRP) of buying the machine (capital) =

= [ $5,500 / ( 1 + 0.10 ) ] + [ $5,500 / ( 1 + 0.10 )2 ]

= ( $5,500 * 0.909 ) + ( $5,500 * 0.826 )

= $9,545.45

(B) Net Present value = Present Discounted Value of the benefit - Initial Investment

= $9,545.45 - $10,500

= - $954.55

(C) No , Not buy the Machine , As the Net Present Worth of the Machine is less than Zero .

And on the Basis on NPV , Project is Acceptable if it is greater than or equal to Zero .

If there is any doubt please ask in comments

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