Live Nutrition is considering the purchase of a new computer system for diagnosing health problems.The company estimates that the system will result in increased operating cash flows of $5,800 in year 1, $6,500 in year 2, and $11,400 in year 3.The company's required rate of return is 8%.What is the maximum cost the company will be willing to pay for the computer system?

Question

Quizplus · Accepted Answer

To calculate the maximum cost that the company will be willing to pay, we need to find the present value of the expected cash flows using the required rate of return of 8%.

PV of cash flows =

$5,800 / (1 + 0.08)^1 = $5,370.37

$6,500 / (1 + 0.08)^2 = $5,436.30

$11,400 / (1 + 0.08)^3 = $9,148.84

Total PV of cash flows = $5,370.37 + $5,436.30 + $9,148.84 = $20,955.51

Therefore, the maximum cost that the company will be willing to pay for the computer system is $19,992, which is less than option D of $43,692 and option B of $23,700.

Live Nutrition Is Considering the Purchase of a New Computer