Your friend in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $100. However, once built, the machine will last forever and will require no maintenance. The machine can be built immediately, but it will cost $1,000 to build. Your friend wants to know if he should invest the money to construct it. If the interest rate is 5.5% per year, what should your friend do? The NPV of the machine is $ (Round to the nearest dollar.) What should your friend do? (Select the best choice below.) O A. Accept the machine because the NPV is equal to or greater than $0. B. Accept the machine because the NPV is equal to or less than $0. C. Reject the machine because the NPV is equal to or greater than $0. D. Reject the machine because the NPV is less than $0.

Your friend in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $100. However, once built, the machine will last forever and will require no maintenance. The machine can be built immediately, but it will cost $1,000 to build. Your friend wants to know if he should invest the money to construct it. If the interest rate is 5.5% per year, what should your friend do? The NPV of the machine is $ (Round to the nearest dollar.) What should your friend do? (Select the best choice below.) O A. Accept the machine because the NPV is equal to or greater than $0. B. Accept the machine because the NPV is equal to or less than $0. C. Reject the machine because the NPV is equal to or greater than $0. D. Reject the machine because the NPV is less than $0.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

See similar textbooks

Similar questions

The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
If a copy center is considering the purchase of a new copy machine with an initial investment cost of $150,000 and the center expects an annual net cash flow of $20,000 per year, what is the payback period?
Olivier wants to buy a hot dog stand that will generate $118,000 per year forever. Because he needs some time to tweak the recipe, he plans to delay production and start generating cash flows 6 years from today. If the discount rate is 8%, what is TODAY's fair price for this hot dog stand?
Your friend in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $700. However, once built, the machine will last forever and will require no maintenance. The machine can be built immediately, but it will cost $7,000 to build. Your friend wants to know if he should invest the money to construct it. If the interest rate is 13.0% per year, what should your friend do? Question content area bottom Part 1 The NPV of the machine is $enter your response here. (Round to the nearest cent.) Part 2 What should your friend do? (Select the best choice below.) A. Accept the machine because the NPV is equal to or less than $0. B. Reject the machine because the NPV is equal to or greater than $0. C.Reject the machine because the NPV is less than $ 0. Reject the machine because the NPV is less than $0. D.Accept the machine because…
Bailey, Inc., is considering buying a new gang punch that would allow it to produce circuit boards more efficiently. The punch has a first cost of $100,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Labor costs would increase $2,000 per year using the gang punch, but raw material costs would decrease $12,000 per year. MARR is 5%/ year. a. What is the discounted payback period for this investment? b. If the maximum attractive DPBP is 3 years, what is the decision rule for judging the worth of this investment? c. Should Bailey buy the gang punch based on DPBP?
A small family business wants to expand and is planning to start an investment, which will cost an initial investment of $50,000. The father is sure that the investment will generate annual cash flows of $11,000 for the next 10 years. In exactly 5 years from now, the machine needs some serious maintenance, which will cost $20,000. At the end of the 10 years, the investment can be sold for $5,000. The MARR (Minimum Attractive Rate of Return) is 12% annual nominal, compounded semi-annually. a) What is the Net Present Value of the investment? $ 1 b) Should the company accept this investment or not?
Kevin learns that the game he has long awaited will be released in two years. He is not sure that his computer will be able to handle this game, so he decides to buy a new one. He estimates that the cost of the computer will be $3200. If he wants to have enough money to buy it by the time the game is released, how much should he invest into an account with an APR of 4.5% compounded monthly? Round your answer to the nearest cent.
A customer is going to buy a brand new pump and motor. It has an initial cost of $10,000. The lifetime of the pump is fifteen years and is estimated to save about $1,000 per year. There is also an additional cost of maintenance at $300 per year with the pump. At the end of its lifetime, the pump will have a salvage value of $0. The interest rate is at 4%. Find the annual value of the pump and what is the salvage value for the pump in order to break even?
Jose is thinking about purchasing a soft drink machine and placing it in a business office. He knows that there is a 5% probability that someone who walks by the machine will make a purchase from the machine, and he knows that the profit on each soft drink sold is $0.10. If Jose expeccts a thousand people per day to pass by the machine and requires a complete return of his investment in one year, then what is the maximum price that he should be willing to pay for the soft drink machine? Assume 250 working daysin a year, and ignore taxes and the time value of money.
Tyrell Corp. is considering replacing a machine. The old one is currently being depreciated at $70,000 per year (straight-line), and is scheduled to end in five years with no remaining book value. If you don’t replace it, you will be lucky to get it removed for the amount you could salvage it for, so you don’t expect any profit in five years. If you replace the old machine now, you believe you can salvage it for $375,000 and buy a new machine for $850,000, plus $25,000 shipping fee and another $25,000 for installation. The new machine will not change the revenue or NOWC, but it will reduce the operating costs of the company by $145,000 per year. The new machine will be depreciated using the three-year MACRS schedule (the table is provided on the Moodle for your convenience). The useful life of this machine is five years, and it is expected that the machine can be sold at $20,000 at the end of the five years. Assume a tax rate of 25% and the cost of capital for the company is 8%.…
Tyrell Corp. is considering replacing a machine. The old one is currently being depreciated at $70,000 per year (straight-line), and is scheduled to end in five years with no remaining book value. If you don't replace it, you will be lucky to get it removed for the amount you could salvage it for, so you don't expect any profit in five years. If you replace the old machine now, you believe you can salvage it for $375,000 and buy a new machine for $850,000, plus $25,000 shipping fee and another $25,000 for installation. The new machine will not change the revenue or NOWC, but it will reduce the operating costs of the company by $145,000 per year. The new machine will be depreciated using the three-year MACRS schedule (the table is provided on the Moodle for your convenience). The useful life of this machine is five years, and it is expected that the machine can be sold at $20,000 at the end of the five years. Assume a tax rate of 25% and the cost of capital for the company is 8%.…