Grayson Company is considering purchase of equipment that costs $49,000 and is expected to offer annual cash inflows of $13,000.Grayson's minimum required rate of return is 10%.How many years must the cash flows last for the investment to be acceptable? (Do not round your intermediate calculations.Round to nearest whole year. )

Question

Quizplus · Accepted Answer

Recall that a present value of zero suggests the investment will earn a rate of return equal to the desired rate.As such,we can set the net present value to zero to determine the minimum expected annual cash flow.
Net present value = (Expected annual cash flows x PV factor)- Cost of investment
$0 = ($13,000 x PV factor)- $49,000
$13,000 x PV factor = $49,000
PV factor = $49,000 ÷ $13,000 = 3.769231 (rounded)
Referring to Appendix Table 2 with i = 10,this factor is closest to the 3.790787factor that relates to 5 years.
Proof that cash flows of at least 5 years will generate a small positive net present value:
Net present value = (Expected annual cash flows x PV factor)- Cost of investment
Net present value = ($13,000 x 3.790787)- $49,000 = $280 (rounded)

Grayson Company Is Considering Purchase of Equipment That Costs $49,000