ROK Company is considering buying a machine that will cost $105,000 and produce
ID: 2381977 • Letter: R
Question
ROK Company is considering buying a machine that will cost $105,000 and produce annual cash flows of $20,000 every year for the next 6 years. The machine will have a salvage value at the end of 6 years of $5,000. The company requires the machine to have a 5% return on investment. Which of the following statements is TRUE regarding this machine?
A)The salvage value of the machine can be ignored in the calculations as it is a sunk cost
B)The company should not buy the machine because the present value of future cash flows will be less than the cost of the machine.
C)The present value of future cash flows is $101,513
D)The net present value of the machine is $245
Explanation / Answer
D
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