Your buddy in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $1,000. However, once built, the machine will last forever and will require no maintenance. The machine can be built immediately, but it will cost $12,000 to build. Your buddy wants to know if he should invest the money to construct it. If the interest rate is 9.5% per year, what should your buddy do?

Question

Business

Milagros Nichols

26 September, 17:03

Your buddy in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $1,000. However, once built, the machine will last forever and will require no maintenance. The machine can be built immediately, but it will cost $12,000 to build. Your buddy wants to know if he should invest the money to construct it. If the interest rate is 9.5% per year, what should your buddy do?

+1

Answers (1)

Know the Answer?

Sage Garza · Answer 1

He shouldn't invest in the machine.

Explanation:

Giving the following information:

Cash flow = $1,000

Initial investment = $12,000

Discount rate = 9.5% annual.

To determine whether it is convenient or not to make the machine, we need to calculate the net present value (NPV). If the NPV is positive, the machine should be made.

NPV = - Io + ∑ (Cf/i)

NPV = - 12,000 + (1,000/0.095) = - 1,473.68

He shouldn't invest in the machine.