Question

A company is considering the purchase of a new machine. The machine has a purchase price of $100,000, a salvage value of $10,000, and a useful life of 5 years. The machine is expected to generate annual net cash flows of $25,000. The company's required rate of return is 10%.

Answer 1

The subject of this question is Business. It involves analyzing the financial aspects of a company's decision to purchase a new machine.

Step-by-step explanation:

The subject of this question is Business. It involves analyzing the financial aspects of a company's decision to purchase a new machine.

To evaluate the purchase, we can use the Net Present Value (NPV) method. The NPV is calculated by subtracting the initial investment (purchase price) from the present value of the expected net cash flows over the useful life of the machine. The present value is determined by discounting future cash flows at the required rate of return.

For this scenario, the NPV can be calculated as follows:

1. Find the present value factor using the formula (1 + r)^(-n), where r is the required rate of return (10%) and n is the number of years. In this case, (1 + 0.1)^(-5) = 0.620921.
2. Multiply the annual net cash flows ($25,000) by the present value factor to get the present value of the cash flows for each year.
3. Sum up the present values for all five years.
4. Finally, subtract the purchase price ($100,000) from the sum of the present values to find the NPV.

Using this method, the NPV will determine the profitability of the investment. A positive NPV indicates that the investment is profitable, while a negative NPV indicates that the investment is not favorable.