Use the following information to answer the next two questions:
A manufacturing firm is deciding whether to invest in a new printer that needs an initial investment of $150,000.This will increase cash flows in the first year by $80,000 and $75,000 in the second year.
-If the cost of capital decreased to 1%,does the firm invest in the new technology?

Question

Use the following information to answer the next two questions:
A manufacturing firm is deciding whether to invest in a new printer that needs an initial investment of $150,000.This will increase cash flows in the first year by $80,000 and $75,000 in the second year.
-If the cost of capital decreased to 1%,does the firm invest in the new technology?
A)Yes because the NPV>0
B)Yes because the NPV=0
C)Need information on the marginal benefits and costs
D)No because the NPV<0

Quizplus · Accepted Answer

When the cost of capital decreases to 1%, we can calculate the NPV using the formula:
NPV = (-150,000) + 80,000/(1+0.01) + 75,000/(1+0.01)^2
NPV = (-150,000) + 79,207.92 + 73,947.21
NPV = 3,154.13
Since the NPV is positive, the firm should invest in the new technology. Therefore, the answer is choice A.

Use the Following Information to Answer the Next Two Questions