Exhibit 13-5

-Exhibit 13-5 shows data on the various dough-mixing machines that a donut shop is considering buying. Assume that any dough-mixing machine is expected to last indefinitely, that operating expenses are negligible, and that the price of donuts is expected to remain constant in the future. If the interest rate is 8 percent and the firm has $3,000 on hand, what should it do?

Question

Exhibit 13-5
 
-Exhibit 13-5 shows data on the various dough-mixing machines that a donut shop is considering buying. Assume that any dough-mixing machine is expected to last indefinitely, that operating expenses are negligible, and that the price of donuts is expected to remain constant in the future. If the interest rate is 8 percent and the firm has $3,000 on hand, what should it do?

Quizplus · Accepted Answer

Based on the information given, we can calculate the present value (PV) of each option by discounting the initial cost at the 8% interest rate.

Option A: PV = $3,000 
Option B: PV = $3,000 
Option C: PV = $1,000 + $2,000/(1+0.08) = $2,629.63 
Option D: PV = $1,500 + $1,000/(1+0.08) = $2,171.30 
Option E: PV = $1,000 + $1,500/(1+0.08) + $1,000/(1+0.08)^2 = $3,093.98

Therefore, option C has the lowest present value and is the best choice. It allows the firm to buy a machine with the one-quart bowl and save $2,000, which can be invested at 8% interest, generating additional income for the firm.

Exhibit 13-5 -Exhibit 13-5 Shows Data on the Various Dough-Mixing Machines That