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?

Question 7 options:

1) No, since the negative net present value indicates the investment will yield a rate of return below the desired rate of return. 2) Yes, since the investment will generate $52,500 in future cash flows, which is greater than the purchase cost of $36,000. 3) Yes, since the positive net present value indicates the investment will earn a rate of return greater than 12%. 4) The answer cannot be determined.

Explanation / Answer

The present value of an annuity of $ 1 at 12% for 5 years is 3.605.

Since annual cash inflows are $ 10,500 , the Present value of cash inflows is 10,500 x 3.605 =$37,852.50

Therefore, the net present value, i.e present value of cash inflows minus the present value of cash outflows is positive.

NPV = 37, 852.50 -36,000 = $ 1,752.50

The correct answer is therefore option 3.

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