I want you to show and explain the explanation below. The answer is correct but i can't understand how it come up with the right answer. Attached pic below is the problem The annual estimated cash flow is $140,000.The salvage value will be 12% of the initial price after 5 years.The discount rate (r) is 18%Let us assume the initial price of the doughnut machine be X.PV of cash inflows=PV of cash outflows$140,000×PVAF4,18%+.12X×PVF5,18%=X$140,000×2.69006180465+.12X×0.43710921621=X$376,608.652651=X-0.05245310594$376,608.652651=0.94754689406XX=$397,456.479475The maximum purchase price of the doughnut machine is $397,456.48. 1.Beloit Co. is a manufacturer of mini-doughnut machine makers. Early in 2018 a customer asked Beloit to quote a pricefor a custom-designed doughnut machine to be delivered by the end of 2018. Once it is purchased, the customer intendsto place the machine in service in January 2019 and will use it four years. The expected annual operating cash flow isestimated to be $140,000. The expected salvage value of the equipment at the end of five years is about 12% of theinitial purchase price. To expect an 18% required rate of return on investment, what is the maximum amount thatshould be spent on purchasing the doughnut machine? Ans. P= $397,456.48

The net present value (NPV) is a financial metric that helps in finding out the total value of an…

Answered: 1.Beloit Co. is a manufacturer of…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 14P

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I want you to show and explain the explanation below. The answer is correct but i can't understand how it come up with the right answer. Attached pic below is the problem

The annual estimated cash flow is $140,000.

The salvage value will be 12% of the initial price after 5 years.

The discount rate (r) is 18%

Let us assume the initial price of the doughnut machine be X.

PV of cash inflows=PV of cash outflows$140,000×PVAF4,18%+.12X×PVF5,18%=X$140,000×2.69006180465+.12X×0.43710921621=X$376,608.652651=X-0.05245310594$376,608.652651=0.94754689406XX=$397,456.479475

The maximum purchase price of the doughnut machine is $397,456.48.

1.Beloit Co. is a manufacturer of mini-doughnut machine makers. Early in 2018 a customer asked Beloit to quote a price
for a custom-designed doughnut machine to be delivered by the end of 2018. Once it is purchased, the customer intends
to place the machine in service in January 2019 and will use it four years. The expected annual operating cash flow is
estimated to be $140,000. The expected salvage value of the equipment at the end of five years is about 12% of the
initial purchase price. To expect an 18% required rate of return on investment, what is the maximum amount that
should be spent on purchasing the doughnut machine? Ans. P= $397,456.48

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