Answer:
The company should buy the equipment since the NPV is positive.
Explanation:
Giving the following information:
Initial investment= $150,00
Annual cash flow= $40,888
Number of periods= 5 years
Discount rate= 10%
To determine whether the company should buy or not the equipment, we need to use the net present value (NPV). If the NPV is positive, the machine increases the value of the company, therefore, it should proceed with the purchase.
NPV= -Io + ∑[Cf/(1+i)^n]
∑[Cf/(1+i)^n]= Cf / (1+i)^n
Cf1= 40,888 / 1.1= 37,170.91
Cf2= 40,888 / 1.1^2= 33,791.74
Cf3= 40,888 / 1.1^3= 30,719.76
Cf4= 40,888 / 1.1^4= 27,927.05
Cf5= 40,888 / 1.1^5= 25,388.23
∑[Cf/(1+i)^n]= $154,997.69
Now, the NPV:
NPV= -150,000 - 154,997.69
NPV= $4,997.69
The company should buy the equipment since the NPV is positive.
