Baird Bros. Construction is considering the purchase of a machine at a cost of $
ID: 2568255 • Letter: B
Question
Baird Bros. Construction is considering the purchase of a machine at a cost of $135,000. The machine is expected to generate cash flows of $26,000 per year for 10 years and can be sold at the end of 10 years for $16,000. Interest is at 12%. Assume the machine purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations.
a.) what is the net present value of cash flows?
b.) should they purchase the machine
Baird Bros. Construction is considering the purchase of a machine at a cost of $135,000. The machine is expected to generate cash flows of $26,000 per year for 10 years and can be sold at the end of 10 years for $16,000. Interest is at 12%. Assume the machine purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations.
a.) what is the net present value of cash flows?
b.) should they purchase the machine
Explanation / Answer
a.) what is the net present value of cash flows?
Net present value = Present value of cash inflow-Present value of cash outflow
= (26000*5.65022+16000*0.32197)-135000
Net present value = 17057.24
b) Yes, they should purchase the machine
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