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
Which management function includes measuring and setting performance objectives for the employees of a manufacturing business? The function includes measuring and setting performance objectives for the employees,
Answers (1)
A vehicle manufacturing company decides to hire 35 employees for its new servicing branch located in texas. a total of 90 eligible applicants apply for the job of which 50 are white and 40 are black.
Answers (1)
In the context of trust and job performance, the ability to focus reflects the degree to which employees can devote their attention to work, as opposed to engaging in workplace politics or saving themselves from problems like abusive supervision.
Answers (2)
Susan has a chance to take two weeks of unpaid leave from her job to go on a trip to Antarctica that will cost $5,000. She earns $2,000 per week. She estimates that the trip will be worth twice what she has to pay for the pleasure it will give her.
Answers (1)
What is the definition of risk? A. putting money into more than one investment B. amount made in profit on an investment C. using borrowed funds for an investment D. possibility of losing money on an investment
Answers (1)
New Questions in Business
Mai and Chuck have been divorced since 2012. They have three boys, ages 6, 8, and 10. All of the boys live with Mai and she receives child support from Chuck. Mai and Chuck both work and the boys need child care before and after school.
Answers (1)
Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2018, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment.
Answers (1)
Assume you work for an employer who will contribute $60 a week for the next 20 years into a retirement plan for your benefit. At a discount rate of 9 percent, what is this employee benefit worth to you today?
Answers (1)
A restaurant manager should consider his own tastes when developing his menu.
Answers (1)
Magnetic-Optical Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock unit plan, the company on January 1, 2021, granted restricted stock units (RSUs) representing 4 million of its $1 par common
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?