Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a desired rate of return of 12%,is the project acceptable?

Question

Quizplus · Accepted Answer

Revised estimate:
Net present value = (Expected annual cash flows x PV factor)- Cost of investment
Net present value = ($10,500 x 3.604776)- $36,000 = $1,850 (rounded)
PV factor from Appendix Table 2 (n = 5,i = 12)
The positive net present value suggests the investment will earn a rate of return in excess of 12 percent (if cash flows are indeed $10,500 each year).Because the projected rate of return is higher than the desired rate of return,this analysis suggests the company should accept the investment opportunity.

Generro Company Is Considering the Purchase of Equipment That Would