Newman Auto Repair is considering the purchase of a hydraulic machine costing approximately $35 000.Using a discount rate of 18 per cent,the present value of future cash inflows are calculated to be $42 000.To yield at least an 18 per cent return,the actual cost of the machine should not exceed the $35 000 estimate by more than:

Question

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The present value of future cash inflows is $42,000, which means the machine is expected to generate this amount or more in cash inflows over its lifetime. The cost of the machine should not exceed $35,000 to earn an 18% return, which means the net cash inflow after deducting the cost should be $35,000 x 1.18 = $41,300 or more.

Therefore, the maximum amount that the actual cost of the machine can exceed the estimate by is $41,300 - $35,000 = $6,300, which is option C. Any amount more than that will result in a return less than 18%. Options A and B are too high, and option D is too low.

Newman Auto Repair Is Considering the Purchase of a Hydraulic