Generro Company is considering the purchase of equipment that would cost $36,000

Question

Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years. Assuming a desired rate of return of 12%, is the project acceptable?

No, since the negative net present value indicates the investment will yield a rate of return below the desired rate of return.

Yes, since the investment will generate $52,500 in future cash flows, which is greater than the purchase cost of $36,000.

Yes, since the positive net present value indicates the investment will earn a rate of return greater than 12%.

The answer cannot be determined.

Explanation / Answer

Yes, since the positive net present value indicates the investment will earn a rate of return greater than 12%. Statemnet showing Cash flows Particulars Time PVf@12% Amount PV Cash Outflows                            -                1.00 (36,000.00)      (36,000.00) PV of Cash outflows      (36,000.00) Cash inflows                     1.00          0.8929     10,500.00           9,375.00 Cash inflows                     2.00          0.7972     10,500.00           8,370.54 Cash inflows                     3.00          0.7118     10,500.00           7,473.69 Cash inflows                     4.00          0.6355     10,500.00           6,672.94 Cash inflows                     5.00          0.5674     10,500.00           5,957.98 PV of Cash Inflows         37,850.15 NPV           1,850.15

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