your buddy in mechanical engineering has invented a money machine. The main draw
ID: 1171389 • Letter: Y
Question
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 $900.?However, once? built, the machine will last forever and will require no maintenance. The machine can be built? immediately, but it will cost $9,000 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? What is your advice if the machine takes one year to? build?
Explanation / Answer
The cash flows are upto perpetuity i.e. infinity thus the value of the money machine would be = $900/9.5% = $9473.68. Thus positive NPV of $473.68. You should invest money in this machine.
When your machine is build in next year, value of machine would be 9473.68 / 1.095 = $8,651.75 i.e. negative NPV. You may have drop this plan and ask your buddy to build something with posittive NPV.
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