The management of Malit Corporation is investigating an investment in equipment
ID: 2384944 • Letter: T
Question
The management of Malit Corporation is investigating an investment in equipment that would have a useful life of 9 years. The company uses a discount rate of 17% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is -$367,742. To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?Explanation / Answer
Financially attractive: NPV >= 0 NPV = PV of future cash inflows - initial investment 0 = x/1.17 + x/1.17^2 + x/1.17^3 + ...+ x/1.17^8 + x/1.17^9 - 367,742 367,742 = x/1.17 + x/1.17^2 + x/1.17^3 + ...+ x/1.17^8 + x/1.17^9 367,742 = x(1/1.17 + 1/1.17^2 + 1/1.17^3 + ...+ 1/1.17^8 + 1/1.17^9) 367,742 = x(1/1.17 + 1/1.17^2 + 1/1.17^3 + ...+ 1/1.17^8 + 1/1.17^9) Now, 1/1.17 + 1/1.17^2 + 1/1.17^3 + ...+ 1/1.17^8 + 1/1.17^9 is a geometric progression where a = 1/1.17, r = 1/1.17, n = 9 sum = 1/1.17 (1 - (1/1.17)^9) / (1 - 1/1.17) = 4.45057 367,742 = 4.45057x x = 82,628 Annual cash flow = $82,628
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