A business would like to buy a large piece of equipment that will improve their cash flow over the next ten years by $30,000 annually. If the company's hurdle rate is 14% and they expect no residual value at the end of the period, how much should the company be willing to pay for the equipment?

Question

Quizplus · Accepted Answer

To find the present value of the expected cash flows over the next ten years, we will use the formula for present value of an annuity:
PV = PMT * [(1 - (1 + r)^-n) / r]
Where PV is the present value, PMT is the annual cash flow, r is the hurdle rate, and n is the number of years.

Plugging in the values given, we get:
PV = $30,000 * [(1 - (1 + 0.14)^-10) / 0.14]
PV = $156,483

Therefore, the company should be willing to pay $156,483 for the equipment.

A Business Would Like to Buy a Large Piece of Equipment