Grayson Company is considering a 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? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your intermediate calculations.Round to the nearest whole year.)

Question

Quizplus · Accepted Answer

We can calculate the net present value (NPV) of the investment as follows:
NPV = present value of cash inflows - cost of equipment
NPV = $13,000(PVAF10%,n) - $49,000
From the PVAF table, we can see that the factor for 5 years at 10% is 3.7908. Therefore,
NPV = $13,000(3.7908) - $49,000
NPV = $1,114.40
Since the NPV is positive, the investment is acceptable. The cash flows must last for at least 5 years, since the annual inflows of $13,000 will produce a total present value of $65,454 at the end of 5 years (from the PVAF table).

Grayson Company Is Considering a Purchase of Equipment That Costs