Question

Bob Johnson is considering purchasing a new piece of equipment for his business. The machine costs...

Bob Johnson is considering purchasing a new piece of equipment for his business. The machine costs $160,000. Bob estimates that the machine can produce $43,000 cash inflow per year for the next five years. His cost of capital is 12 percent. Based upon the net present value of this investment, Bob should

Group of answer choices

invest in the equipment.

invest in the machine if he can get a higher cost of capital.

not invest in the machine.

Cannot tell without additional information.

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Homework Answers

Answer #1

Correct answer is option C.not invest in the machine

First we need to calculate Net Present Value [ NPV ] of the machine

NPV = Present value of cash inflows - Initial investment

=43000*PVIFA,12%5 - 160,000

=43000*3.604776 -160,000

=155,005.37-160,000

= -4994.63

It is to be noted that,NPV is negetive and not feasible to invest in the machine.Moreover higher cost of capital will increase the loss,so should avoid the same.

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is Discount rate and “n” is the useful life of investment

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