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Briarwood Enterprises is considering the purchase of some new equipment that will cost the company $151,800. The equipment is estimated to have a 6 year life and no salvage value. The equipment is expected to generate $34,000 of cash inflows each year over the life of the asset. Briarwood's cost of capital is 10%.
-Ignoring income taxes,the maximum price Briarwood should pay for this equipment is:

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Briarwood Enterprises is considering the purchase of some new equipment that will cost the company $151,800. The equipment is estimated to have a 6 year life and no salvage value. The equipment is expected to generate $34,000 of cash inflows each year over the life of the asset. Briarwood's cost of capital is 10%.
-Ignoring income taxes,the maximum price Briarwood should pay for this equipment is:

Quizplus · Accepted Answer

To calculate the maximum price Briarwood should pay for this equipment, we need to use the net present value (NPV) formula:

NPV = -initial cost + PV of cash inflows

where PV is the present value.

Using a financial calculator or Excel, we can find that the PV of $34,000 cash inflows for 6 years, with a discount rate of 10%, is $160,882.

Therefore,

NPV = -$151,800 + $160,882 = $9,082

Since the NPV is positive, the investment is expected to earn a return higher than the cost of capital, and thus Briarwood should proceed with the investment.

The maximum price Briarwood should pay is the initial cost of $151,800. Therefore, the correct answer is B) $148,079, which is the closest to the initial cost.

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