Paramount Company is considering purchasing new equipment costing $700,000. The management has estimated that the equipment will generate cash flows as follows: Present value of $1: The company's required rate of return is 8%. Using the factors in the table, calculate the present value of the cash inflows. (Round all calculations to the nearest whole dollar)

Question

Paramount Company is considering purchasing new equipment costing $700,000. The management has estimated that the equipment will generate cash flows as follows:  Present value of $1:  The company's required rate of return is 8%. Using the factors in the table, calculate the present value of the cash inflows. (Round all calculations to the nearest whole dollar)

Quizplus · Accepted Answer

Using the present value of $1 table at 8%, we can calculate the present value of each cash inflow:
Year 1: $280,000 / 1.08 = $259,259
Year 2: $300,000 / 1.08^2 = $259,259
Year 3: $350,000 / 1.08^3 = $270,554
Year 4: $450,000 / 1.08^4 = $309,622
Year 5: $450,000 / 1.08^5 = $281,354
Adding up these present values, we get $1,380,048. Rounded to the nearest whole dollar, the present value of the cash inflows is $841,000. This is less than the cost of the equipment, so the company should not make the purchase.

Paramount Company Is Considering Purchasing New Equipment Costing $700,000