Dexter Company is considering purchasing equipment.The equipment will produce the following cash flows: $\begin{array}{ll}
\text { Year 1 } & \$ 120,000 \
\text { Year 2 } & \$ 200,000
\end{array}$ Dexter requires a minimum rate of return of 10%.What is the maximum price Dexter should pay for this equipment?
A)$274,380
B)$165,290
C)$320,000
D)$160,000

Question

Quizplus · Accepted Answer

The maximum price Dexter should pay is the present value of the cash flows discounted at the required rate of return (10%). The present value of Year 1 is $ \$120,000 / (1+0.10)^1 = \$109,090.91 $ and Year 2 is $ \$200,000 / (1+0.10)^2 = \$165,289.26 $. The total present value is approximately \$274,380.

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