Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: Year $1 \quad \$ 120,000$
Year $2 \quad \$ 200,000$ Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment?
A) $274,381
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 cash flow is $ \$120,000 / (1+0.10)^1 = \$109,091 $ and Year 2 is $ \$200,000 / (1+0.10)^2 = \$165,290 $. Adding these gives $ \$274,381 $.

Dexter Company Is Considering Purchasing Equipment 1$120,0001 \quad \$ 120,0001$120,000 Year 2$200,0002 \quad \$ 200,0002$200,000

Dexter Company Is Considering Purchasing Equipment $1 \quad \$ 120,000$ Year $2 \quad \$ 200,000$