Use the information below to answer the following question(s).
Neptune Ltd. wants to expand its operations by manufacturing a new product line. New equipment will cost $225,000. Incremental sales are estimated at $150,000 per year for 6 years. Variable costs of producing the new product line are 52% of sales and incremental annual fixed costs are $25,000. The equipment can be salvaged after 6 years for 16% of its original cost. The company's required rate of return for new projects is 18%. Ignore income taxes.
-Shirt Company wants to purchase a new cutting machine for its sewing plant. The investment is expected to generate annual cash inflows of $300,000 recognized at the end of each year. The required rate of return is 12 percent and the new machine is expected to last for 4 years. What is the maximum dollar amount Shirt Company would be willing to spend for the machine?

Question

Quizplus · Accepted Answer

The maximum dollar amount Shirt Company would be willing to spend for the machine is calculated using the present value of annuity formula, which is Cash Inflow per Period / Required Rate of Return * (1 - (1 + Required Rate of Return)^-n), where n is the number of periods. For this scenario, the calculation is $300,000 / 0.12 * (1 - (1 + 0.12)^-4), which equals approximately $911,205. This is the present value of the cash inflows generated by the machine, indicating the maximum amount the company should be willing to pay for it to achieve at least their required rate of return.

Use the Information Below to Answer the Following Question(s)