Figure 6
JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 percent.
-Refer to Figure 6. Based on quantitative factors, should JD accept, reject, or wait on the project?

Question

Quizplus · Accepted Answer

The project should be accepted because the Net Present Value (NPV) is positive. Calculating the NPV involves discounting the annual cash inflows at the firm's cost of capital (12%) and subtracting the initial investment. Over 5 years, the cash inflows discounted at 12% exceed the initial £400,000 investment, indicating a positive NPV and making the project financially viable.

Figure 6 JD, Inc., Is Considering the Purchase of Production Equipment That