Financial Accounting Edwin Ogden owns a service station and has the oppourtunity

Question

Financial Accounting

Edwin Ogden owns a service station and has the oppourtunity to purchase a car wash machine for $15,000. After carefully studying projected costs and revenues, Ogden estimates that the car wash machine will produce a net cash flow of $2,600 anually and will last for 8 years. He determines that an interest rate of 14% is adequate for his business. Calculate the present value of the machine to Ogden. (Note: Tables 1 and 2 in Appendix B may be used when appropiate.) Does the purchase appear to be a smart business decision? Explain your answer.

Explanation / Answer

NPV= PV OF CASH INFLOW-PV OF CASH OUTFLOW $12061.05-15000 $ -2939 ITS BETTER TO REJECT THE PROPOSAL PV OF CASH INFLOW ANNUAL NET CASH INFLOW $2,600 SUM OF PV FACTOR OF 14% FOR 8 YEARS 4.638864 PV OF CASH INFLOWS 12061.05 $

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