Barney Googal owns a garage and is contemplating purchasing a tire retreading ma
ID: 2490252 • Letter: B
Question
Barney Googal owns a garage and is contemplating purchasing a tire retreading machine for $25,820. After estimating costs and revenues, Barney projects a net cash inflow from the retreading machine of $4,000 annually for 10 years. Barney hopes to earn a return of 8% on such investments. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) What is the present value of the retreading operation? (Round answer to 2 decimal places, e.g. 25.25.) Should Barney Googal purchase the retreading machine?Explanation / Answer
Year
Cash Flow
PV Factor @ 8 %
PV
0
$ (25,820)
1.00000
$ (25,820.00000)
1
$ 4,000
0.92593
$ 3,703.70370
2
$ 4,000
0.85734
$ 3,429.35528
3
$ 4,000
0.79383
$ 3,175.32896
4
$ 4,000
0.73503
$ 2,940.11941
5
$ 4,000
0.68058
$ 2,722.33279
6
$ 4,000
0.63017
$ 2,520.67851
7
$ 4,000
0.58349
$ 2,333.96158
8
$ 4,000
0.54027
$ 2,161.07554
9
$ 4,000
0.50025
$ 2,000.99587
10
$ 4,000
0.46319
$ 1,852.77395
NPV
$ 1,020.33
Present value : $ 1,020.33
As PV factor is positive, the project is acceptable.
Barney Googal should purchase the retreading machine
Year
Cash Flow
PV Factor @ 8 %
PV
0
$ (25,820)
1.00000
$ (25,820.00000)
1
$ 4,000
0.92593
$ 3,703.70370
2
$ 4,000
0.85734
$ 3,429.35528
3
$ 4,000
0.79383
$ 3,175.32896
4
$ 4,000
0.73503
$ 2,940.11941
5
$ 4,000
0.68058
$ 2,722.33279
6
$ 4,000
0.63017
$ 2,520.67851
7
$ 4,000
0.58349
$ 2,333.96158
8
$ 4,000
0.54027
$ 2,161.07554
9
$ 4,000
0.50025
$ 2,000.99587
10
$ 4,000
0.46319
$ 1,852.77395
NPV
$ 1,020.33
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