Asked by Dalanie Krogman on Jul 18, 2024
Verified
Advantage Milling Devices is preparing to buy a new machine for precision milling of special metal alloys. This device can earn $300 per hour, and can run 3,000 hours per year. The machine is expected to be this productive for four years. If the interest rate is 6%, what is the present value? What is the present value if the interest rate is not 6%, but 9%? Why does present value fall when interest rates rise?
Present Value
The current worth of a future sum of money or stream of cash flows, given a specified rate of return.
Interest Rates
The cost of borrowing money, typically expressed as a percentage of the total amount loaned, paid to the lender over a specific period of time.
- Assess investment choices through the computation of present value.
Verified Answer
AC
Ashley CasillasJul 19, 2024
Final Answer :
S = R ∗ X = 300 ∗ 3,000 ∗ 3.465 = $3,118,500; S = R ∗ X = 300 ∗ 3,000 ∗ 3.240 = $2,916,000
NPV falls because higher interest rates create a greater discount on future receipts.
NPV falls because higher interest rates create a greater discount on future receipts.
Learning Objectives
- Assess investment choices through the computation of present value.