Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: $$\begin{array} { l l }
\text { Year 1 } & \$ 120,000 \
\text { Year 2 } & \$ 200,000
\end{array}$$ Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment?
A) $274381
B) $165290
C) $320000
D) $160000

Question

Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: $$\begin{array} { l l } 
\text { Year 1 } & \$ 120,000 \
\text { Year 2 } & \$ 200,000
\end{array}$$ Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment?
A) $274381
B) $165290
C) $320000
D) $160000

Quizplus · Accepted Answer

To find the maximum price Dexter should pay for the equipment, we calculate the present value of the cash flows at the required rate of return of 10%. The present value (PV) formula is: $$PV = \frac{CF_1}{(1+r)^1} + \frac{CF_2}{(1+r)^2}$$ where $CF_1$ and $CF_2$ are the cash flows in Year 1 and Year 2, respectively, and $r$ is the rate of return.Substituting the given values:$$PV = \frac{120,000}{(1+0.10)^1} + \frac{200,000}{(1+0.10)^2}$$$$PV = \frac{120,000}{1.10} + \frac{200,000}{1.21}$$$$PV = 109,090.91 + 165,289.26$$$$PV = 274,380.17$$Rounded to the nearest dollar, the maximum price Dexter should pay for the equipment is $274,381.

Dexter Company Is Considering Purchasing Equipment Year 1 $120,000 Year 2 $200,000\begin{array} { l l } \text { Year 1 } & \$ 120,000 \\\text { Year 2 } & \$ 200,000\end{array} Year 1 Year 2 ​$120,000$200,000​

Dexter Company Is Considering Purchasing Equipment $\begin{array} { l l } \text { Year 1 } & \$ 120,000 \\\text { Year 2 } & \$ 200,000\end{array}$