Asked by ashish adhikari on Jul 11, 2024
Verified
Health Care Systems of the South is about to buy an expensive piece of diagnostic equipment. The company estimates that it will generate uniform revenues of $500,000 for each of the next eight years. What is the present value of this stream of earnings, at an interest rate of 6%? What is the present value if the machine lasts only six years, not eight? If the equipment cost $2,750,000, should the company purchase it?
Present Value
The current worth of a future sum of money or stream of cash flows given a specified rate of return.
Interest Rate
The amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal.
- Appraise investment options by applying present value calculations.
Verified Answer
WB
Wyatt BoswellJul 16, 2024
Final Answer :
S = R ∗ X = 500,000 ∗ 6.210 = $3,105,000; S = R ∗ X = 500,000 ∗ 4.917 = $2,458,500
The company should purchase the equipment if it believes it will last eight years, but not if it fears that it will last only six.
The company should purchase the equipment if it believes it will last eight years, but not if it fears that it will last only six.
Learning Objectives
- Appraise investment options by applying present value calculations.