Door to Door Moving Company is considering purchasing new equipment that costs $
ID: 2467405 • Letter: D
Question
Door to Door Moving Company is considering purchasing new equipment that costs $720, 000. Its management estimates that the equipment will generate cash flows as follows:
Year 1
$ 204, 000
2
204, 000
3
262, 000
4
262, 000
5
160, 000
Present value of $1:
6%
7%
8%
9%
10%
1
0.943
0.935
0.926
0.917
0.909
2
0.890
0.873
0.857
0.842
0.826
3
0.840
0.816
0.794
0.772
0.751
4
0.792
0.763
0.735
0.708
0.683
5
0.747
0.713
0.681
0.605
0.621
The company's annual required rate of return is 8%. Using the factors in the table, calculate the present value of the cash inflows. (Round all calculations to the nearest whole dollar.)
A. $888, 000
B. $786, 000
C. $36, 312
D. $873, 290
Year 1
$ 204, 000
2
204, 000
3
262, 000
4
262, 000
5
160, 000
Explanation / Answer
D. $873290
Computation of present value of the cash flows
Years Cash flows Discount@8% Present value of cash flows
1 204000 0.926 188904
2 204000 0.857 174828
3 262000 0.794 208028
4 262000 0.735 192570
5 160000 0.681 108960
Total present value of cash flows 873290
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