(Ignore income taxes in this problem.) Stutz Company purchased a machine with an
ID: 2493375 • Letter: #
Question
(Ignore income taxes in this problem.) Stutz Company purchased a machine with an estimated useful life of nine years. The machine will generate cash inflows of $10,800 each year over the next nine years. If the machine has no salvage value at the end of nine years, if Stutz's discount rate is 10%, and if the net present value of this investment is $22,000, then the purchase price of the machine was: (Round your 'PV factors' to three decimal places. Round your other intermediate calculations and final answer to the nearest whole dollar.) (Use Exhibit11b-1, Exhibit11b-2)
Explanation / Answer
NPV = -PV CFO + PV CF1 + ……
NPV = Net present value =$22,000
CFO= initial cash outflow (investment) =? i.e Purchase price of Machine
CF1 to CF9=10,800
PV= PV Factor
Discount rate = 10%
22,000=-CFO + (0.9091 x 10,800) + 0.8264 x 10,800+ …….
22,000= -CFO + 5.7590 x 10,800
22,000= -CFO + 62,197
CFO= 62,197-22,000
CFO= 40,197
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