Dobson Contractors is considering buying equipment at a cost of $75,000. The equ

Question

Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. Interest is at 12%. Assume the equipment would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Potential applicable discounting factors are as follows: Should Dobson purchase the machine? Justify your response using time value of money concepts.

Explanation / Answer

Statement showing Cash flows Particulars Time PVf@12% Amount PV Cash Outflows                          -                  1.00 (75,000.00)      (75,000.00) PV of Cash outflows      (75,000.00) Cash inflows 1-8           4.9676     15,000.00         74,514.60 Cash inflows 8           0.4039        5,000.00           2,019.40 PV of Cash Inflows         76,534.00 NPV = PVCI - PVCO           1,534.00 Yes Since NPV is positive

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