You are considering buying a new machine for your factory. You estimate that you

Question

You are considering buying a new machine for your factory. You estimate that your profits will increase by $25,000 over its first year in operation (for simplicity assume profits are received at the end of each year), $20,000 over its second year, $10,000 over its third year, at which time you will be able to sell it for $5,000. If interest rates are 10%, what is the maximum amount you should pay for this machine? Answer a. $46,769.35 b. $60,000.00 c. $51,769.35 d. $50,525.92 You are considering buying a new machine for your factory. You estimate that your profits will increase by $25,000 over its first year in operation (for simplicity assume profits are received at the end of each year), $20,000 over its second year, $10,000 over its third year, at which time you will be able to sell it for $5,000. If interest rates are 10%, what is the maximum amount you should pay for this machine? $46,769.35 $60,000.00 $51,769.35 $50,525.92 a. $46,769.35 b. $60,000.00 c. $51,769.35 d. $50,525.92

Explanation / Answer

Hi,

Please find the answer as follows:

You need to calculate the Present value of the machine in this case. Calculations are shown below:

PV = 25000/(1+.10)^1 + 20000/(1+.10)^2 + 15000/(1+.10)^3 = 50525.92

Option D is correct.

Thanks.

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