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Barney Googal owns a garage and is contemplating purchasing a tire retreading machine for $11,820. After estimating costs and revenues, Barney projects a net cash inflow from the retreading machine of $2,700 annually for 7 years. Barney hopes to earn a return of 11% on such investments Click here to view the factor table (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) What is the present value of the retreading operation? (Round answer to 2 decimal places, e.g. 25.25.) Present value Should Barney Googal purchase the retreading machine?

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chamberlainuket

Answer:

A, 902.94

Explanation:

Calculate present value:

Present value =(Present value of annual cash flow-Present value of outflow) = (2700*4.71220)-11820 = 902.94

b) Barney Googal Should purchase the retreading machine.

anthougo

1. The present value of the retreading operation by Barney Googal's Garage is $12,722.94.

2. Barney Googal should purchase the retreading machine since it yields a positive net present value of $902.94.

Data and Calculations:

Cost of retreading machine = $11,820

Annual projected net cash inflow from retreading machine = $2,700

Period of project and cash inflow = 7 years

Expected rate of return = 11%

Annuity factor at 11% for 7 years = 4.71220

The present value of the operation = $12,722.94 ($2,700 x 4.71220)

NPV = $902.94 ($12,722.94 - $11,820)

Thus, Barney Googal should continue with the purchase of the retreading machine since the project will yield a positive NPV of $902.94.

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