Ask Question
BusinessBusiness
16 November, 13:48

A machine would cost $100,000, and would generate revenues of $21,000 per year. However, O&M costs would be $7,000 per year. The machine would last 10 years and your MARR is 7% annual rate compounded annually. (a) What is the net present value of this potential investment? (b) Should you invest in this machine? Give one sentence answer for why or why not.

+1
Answers (2)
  1. 16 November, 14:21
    0
    (a) What is the net present value of this potential investment?

    Net present value of Investment is $ (3,903)

    (b) Should you invest in this machine?

    We should not invest in this investment because Net present value of this investment is negative by discounting Minimum acceptable rate of return.

    Explanation:

    Present Values:

    Revenue $144,146

    O&M Cost ($48,049)

    Initial Investment $ (100,000)

    Net Present value $ (3,903)

    Working:

    Present Value Calculation = P x ((1 - (1 + r) ^-10) / r

    Revenue = $21,000 x ((1 - (1 + 0.075) ^-10) / 0.075 = 144,146

    O&M Costs = $7,000 x ((1 - (1 + 0.075) ^-10) / 0.075 = 48,049
  2. 16 November, 14:42
    0
    A) NPV = - 1669.6

    B) Since this value is negative, the machine should not be invested in because the cash outflow is greater than the inflow.

    Explanation:

    The question is to determine whether we should invest in the machine or not using the net present value formula for calculation as follows:

    Step 1: We determine the Net present Value of the annual receipts

    =The Revenue expected yearly - the Costs incurred yearly

    = $21,000 - $7,000

    = $14,000

    Based on this estimated amount, we then determine the present values of the cash flow as follows

    To do this, we use the Present Value Interest Factors for a One-Dollar Annuity Table

    We use 7% annual rate and 10 year period. We plug this into the table and get 7.0236

    Also, using this formula we arrive at the same figure PVIFA = [1 - 1 / (1 + k) n] / k

    Based on the figure:

    The present Value of the cash flow for 10 years

    = $14,000 x (the Present Value of Annuity determined above)

    = $14,000 x 7.0236

    = $98,330.4

    Finally, the Net present Value

    = The Present Value of Cash inflows - The initial cost of the machine

    = $98,330.4 - $100,000

    = - 1669.6

    Since this value is negative, the machine should not be invested in because the cash outflow is greater than the inflow.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “A machine would cost $100,000, and would generate revenues of $21,000 per year. However, O&M costs would be $7,000 per year. The machine ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers
You Might be Interested in
The omission of the adjusting entry to record depreciation expense will result in an A. understatement of assets and an understatement of owner's equity. B. overstatement of assets and an overstatement of owners' equity. C.
Answers (1)
Discuss the various factors that account for the way divergence can be achieved in advertising creativity. Find an example of an advertisement that reflects these various characteristics and explain how it does so.
Answers (1)
Which of the following statements best describes the data shown for 2012 to 2015? Spending and tax rates will both decrease. Spending and tax rates will remain about the same. Spending will decrease relative to tax revenue.
Answers (1)
Licensee Frank works for Broker Harry. Frank lists a home. Licensee Mary, who works for Broker Sam, sells Frank's listing. With whom does the seller have the agency agreement? a. Frank b. Mary c. Harry d. Sam
Answers (1)
On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears.
Answers (1)
New Questions in Business
Mark is refinishing an antique china cabinet and has already spent $180 on the restoration. He expects to be able to sell the cabinet for $360.
Answers (1)
During the taking of its physical inventory on December 31, Almond Supplies Company incorrectly counted its inventory as $545,000 instead of the correct amount of $554,000.
Answers (1)
When using the indirect method to calculate and report net cash provided or used by operating activities, which of the following is subtracted from net income?1) Bad debts expense. 2) Decrease in income taxes payable. 3) Depreciation expense.
Answers (1)
On January 2, 2018, the Matthews Band acquires sound equipment for concert performances at a cost of $66,400. The band estimates it will use this equipment for four years, during which time it anticipates performing about 200 concerts.
Answers (1)
Which of the following statements accurately describes the efficient market hypothesis? A. Stock prices must go up upon good news, even if the news was expected. B.
Answers (1)
Home » Business » A machine would cost $100,000, and would generate revenues of $21,000 per year. However, O&M costs would be $7,000 per year. The machine would last 10 years and your MARR is 7% annual rate compounded annually.
Sign Up Forgot Password?