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 PV factors and intermediate calculations. Round to nearest whole year.)

Question

Quizplus · Accepted Answer

We can use the Present Value of Annuity formula to find out how many years the cash flows must last to achieve a minimum required rate of return of 10%.

PV = PMT x [1 - 1 / (1 + r)n] / r

Where PV is the present value of the cash inflows (which equals the cost of the equipment), PMT is the annual cash inflow, r is the required rate of return, and n is the number of years.

Substituting the given values, we get:

$49,000 = $13,000 x [1 - 1 / (1 + 0.10)n] / 0.10

Simplifying the equation, we get:

3.7692 = [1 - 1 / (1 + 0.10)n]

Using trial and error, we can find that n = 5 satisfies the equation (rounded to the nearest whole year). Therefore, the investment is acceptable if the cash flows last for at least 5 years.

Thus, the best choice is B.

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