Barney Googal owns a garage and is contemplating purchasing a tire retreading ma

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 $3,400 annually for 12 years. Barney hopes to earn a return of 7% 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

NPV = CF * ( 1 -( 1+r)-n)/r-Initial investment CF = Net cash inflow = 3400 r = rate =7% =0.07 n = 12 Initial Investment = 25820 NPV = 3400 * ( 1-(1+0.07)-12)/0.07 - 25820          = 3400 * ( 1 - 0.4440) /0.07 - 25820          = 3400 * 0.5560 / 0.07 - 25820          = 3400 * 7.9429 - 28520          = 27005.71 - 28520          = - 1514.29 Barney should not purchase the retreading machine as the NPV is negative

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