The Becker Company is interested in buying a piece of equipment. The following data have been assembled concerning this equipment:

This equipment is expected to have a useful life of six years. At the end of the sixth year, the working capital would be released for use elsewhere. The company's discount rate is 10%. (Ignore income taxes in this problem.)

-The present value of the net cash flows (all cash inflows minus all cash outflows)occurring during year six is closest to which of the following?

Question

The Becker Company is interested in buying a piece of equipment. The following data have been assembled concerning this equipment:

This equipment is expected to have a useful life of six years. At the end of the sixth year, the working capital would be released for use elsewhere. The company's discount rate is 10%. (Ignore income taxes in this problem.)

-The present value of the net cash flows (all cash inflows minus all cash outflows)occurring during year six is closest to which of the following?

Quizplus · Accepted Answer

To calculate the present value of net cash flows occurring during year six, we need to use the formula:

Present value = Cash Flow / (1 + Discount Rate)^n

where n is the number of years from the present (in this case, year 1) to the year when the cash flow occurs (year 6).

We are not given the exact cash flows for year six, but we are told that they represent the release of working capital. We can interpret this as a negative cash flow (since it represents an outflow of cash from the company). Let's assume that the amount of working capital released at the end of year six is $200,000.

Using the formula above, the present value of this cash flow would be:

Present value = -$200,000 / (1 + 0.1)^5
Present value = -$106,734.69

Note that the cash flow is negative, which makes the present value negative as well.

The closest answer choice to this calculation is B) $152,280. Therefore, the best choice is B.

The Becker Company Is Interested in Buying a Piece of Equipment