Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: $\begin{array}{ll}
\text { Year 1 } & \$ 90,000 \
\text { Year 2 } & \$ 150,000
\end{array}$ Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment?
A) $205,785
B) $123,968
C) $240,000
D) $120,000

Question

Quizplus · Accepted Answer

The maximum price Dexter should pay is the present value of the cash flows at the required rate of return of 10%. Calculating the present value: Year 1: $ \frac{90,000}{1.1} = 81,818.18 $, Year 2: $ \frac{150,000}{(1.1)^2} = 123,966.94 $. Total present value = $205,785.12, which rounds to $205,785.

Dexter Company Is Considering Purchasing Equipment Year 1 $90,000 Year 2 $150,000\begin{array}{ll}\text { Year 1 } & \$ 90,000 \\\text { Year 2 } & \$ 150,000\end{array} Year 1 Year 2 ​$90,000$150,000​

Dexter Company Is Considering Purchasing Equipment $\begin{array}{ll}\text { Year 1 } & \$ 90,000 \\\text { Year 2 } & \$ 150,000\end{array}$