erry owns a restaurant and has the opportunity to buy a high-quality espresso coffee machine for $5,000. After carefully studying projected costs and revenues, Jerry estimates that the machine will produce a net cash flow of $1,600 annually and will last for five years. He determines that an interest rate of 10% is an adequate return on investment for his business. Calculate the present value of the machine to Jerry. Based on your calculation, do you think a decision to purchase the machine would be wise?
erry owns a restaurant and has the opportunity to buy a high-quality espresso coffee machine for $5,000. After carefully studying projected costs and revenues, Jerry estimates that the machine will produce a net cash flow of $1,600 annually and will last for five years. He determines that an interest rate of 10% is an adequate return on investment for his business. Calculate the present value of the machine to Jerry. Based on your calculation, do you think a decision to purchase the machine would be wise?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Jerry owns a restaurant and has the opportunity to buy a high-quality espresso coffee machine for $5,000. After carefully studying projected costs and revenues, Jerry estimates that the machine will produce a net cash flow of $1,600 annually and will last for five years. He determines that an interest rate of 10% is an adequate return on investment for his business.
Calculate the present value of the machine to Jerry. Based on your calculation, do you think a decision to purchase the machine would be wise?
Transcribed Image Text:Present Value of $1
Periods
1.0%
2.0%
3.0%
3.75%
4.0%
4.25%
5.0%
1
0.99010
0.98039
0.97087
0.96386
0.96154
0.95923
0.95238
2
0.98030
0.96117
0.94260
0.92902
0.92456
0.92013
0.90703
0.97059
0.94232
0.91514
0.89544
0.88900
0.88262
0.86384
4
0.96098
0.92385
0.88849
0.86307
0.85480
0.84663
0.82270
0.95147
0.90573
0.86261
0.83188
0.82193
0.81212
0.78353
6.
0.94205
0.88797
0.83748
0.80181
0.79031
0.77901
0.74622
7
0.93272
0.87056
0.81309
0.77283
0.75992
0.74725
0.71068
8
0.92348
0.85349
0.78941
0.74490
0.73069
0.71679
0.67684
9.
0.91434
0.83676
0.76642
0.71797
0.70259
0.68757
0.64461
10
0.90529
0.82035
0.74409
0.69202
0.67556
0.65954
0.61391
Transcribed Image Text:Present Value of Annuity of $1
Periods
1.0%
2.0%
3.0%
3.75%
4.0%
4.25%
5.0%
1
0.99010
0.98039
0.97087
0.96386
0.96154
0.95923
0.95238
2
1.97040
1.94156
1.91347
1.89287
1.88609
1.87936
1.85941
3
2.94099
2.88388
2.82861
2.78831
2.77509
2.76198
2.72325
4
3.90197
3.80773
3.71710
3.65138
3.62990
3.60861
3.54595
4.85343
4.71346
4.57971
4.48326
4.45182
4.42073
4.32948
5.79548
5.60143
5.41719
5.28507
5.24214
5.19974
5.07569
7
6.72819
6.47199
6.23028
6.05790
6.00205
5.94699
5.78637
8
7.65168
7.32548
7.01969
6.80280
6.73274
6.66378
6.46321
9.
8.56602
8.16224
7.78611
7.52077
7.43533
7.35135
7.10782
10
9.47130
8.98259
8.53020
8.21279
8.11090
8.01089
7.72173
Expert Solution
Step 1
Net present value means the difference between the present value of cash inflow and present value of cash outflow.
If it is positive , then project should be accepted , otherwise rejected.
Necessary calculations has been made.
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