Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows:
Year 1 $120,000
Year 2 $200,000
Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment?

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 $120,000 in Year 1 is $120,000 / (1+0.10) = $109,091, and the present value of $200,000 in Year 2 is $200,000 / (1+0.10)^2 = $165,289. The total present value is $109,091 + $165,289 = $274,380, which is closest to option A.

Dexter Company Is Considering Purchasing Equipment