Question

Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1 $120,000 Year 2 $200,000 Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment?

Answer 1

$274,381 is the maximum price Dexter should pay for this equipment

Solution:

Given ,

The equipment will produce the following cash flows:

Year 1 $120,000

Year 2 $200,000

Present value = Future inflows * Present value of discounting factor (10%,time period)

=
`(120,000)/(1.1)` +
`(200,000)/((1.1)^(2) )`

= $274,381 (Approx)

$274,381 is the maximum price Dexter should pay for this equipment