Newman Auto Repair is considering the purchase of a hydraulic machine costing approximately $35,000. Using a discount rate of 18%, the present value of future cash inflows are calculated to be $42,000. To yield at least an 18% return, the actual cost of the machine should not exceed the $35,000 estimate by more than:

Question

Quizplus · Accepted Answer

The present value of future cash inflows is $42,000 and the cost of the machine is $35,000. To yield at least an 18% return, the net present value (NPV) of the investment should be positive. 
NPV = Present value of cash inflows - Cost of investment
NPV = $42,000 - $35,000 = $7,000
Therefore, the actual cost of the machine should not exceed the estimate by more than $7,000 to yield at least an 18% return. 
Option C is the best choice as it is the only one within this range.

Newman Auto Repair Is Considering the Purchase of a Hydraulic