Asked by Cameron Brown on May 10, 2024
Verified
Thompson Corporation is considering the purchase of a new piece of machinery. Thompson expects the new machinery to increase its revenues by $70,000 at the end of year 1, $60,000 at the end of year 2, and $50,000 at the end of year 3 at which point the machinery will have exhausted its useful life. If the interest rate is 4%, what is the most Thompson should be willing to pay today for this piece of machinery?
Revenues
The total incomes that a business receives from its normal business activities, usually from the sale of goods and services to customers.
Useful Life
The expected period of time during which an asset remains useful to the owner or is capable of generating revenue.
Interest Rate
The percentage of a sum of money charged for its use, reflecting the cost of credit or the return on investment.
- Examine investment proposals employing the net present value (NPV) and internal rate of return (IRR) strategies.
- Scrutinize and figure out the earnings potential of investments amid fluctuating interest rates.
Verified Answer
AC
Adrian CastanedaMay 11, 2024
Final Answer :
The present value of the future revenues generated by the machinery is $167,230.88. Thompson should not be willing to pay any more than this for the machinery.
Learning Objectives
- Examine investment proposals employing the net present value (NPV) and internal rate of return (IRR) strategies.
- Scrutinize and figure out the earnings potential of investments amid fluctuating interest rates.