(b) Telecom Namibia is considering the purchase of a machine at the of cost 100
ID: 1203848 • Letter: #
Question
(b) Telecom Namibia is considering the purchase of a machine at the of cost 100 thousand dollars, and which has a lifespan of only two years, after which it has a zero scrap vale. This investment, if undertaken, will generate gross return of 53 thousand dollars and 84 thousand dollars at the end of the first year and second year, respectively, after deducting all the cost except depreciation and interest rate cost. Should Telecom Namibia go ahead with this investment when the prevailing rate of interest is 18 percent? Explain.
Explanation / Answer
Answer:
Machine purchasing cost: $100,000
Lifespan: 2years
The gross returns for 1st year: $53,000 and for 2nd year: $84,000
Interest rate: 18%
Now, we can calculate what investment should need to Telecom of Namibia. That is:
NPV = -100,000 + ($53,000 + $84,000)(P/A, 18%, 2)
= -100,000 + 137,000 (1.5696)
= -100,000 + 215,035.2
= $115,035.2
Therefore, $115,035.2 should invest to go ahead for Telecom Namibia.
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