Use this information to answer the following question. You have the opportunity to purchase a machine for $10,000.After careful study of expected costs and revenues,you estimate that the machine will produce a net cash flow of $3,200 annually and will last 5 years.Based on an interest rate of 7 percent,determine the present value of the machine and if the machine should be purchased.
A)$13,120,the machine should not be purchased
B)$13,120,the machine should be purchased
C)$2,282,the machine should not be purchased
D)$7,130,the machine should not be purchased

Question

Use this information to answer the following question.  You have the opportunity to purchase a machine for $10,000.After careful study of expected costs and revenues,you estimate that the machine will produce a net cash flow of $3,200 annually and will last 5 years.Based on an interest rate of 7 percent,determine the present value of the machine and if the machine should be purchased.
A)$13,120,the machine should not be purchased 
B)$13,120,the machine should be purchased 
C)$2,282,the machine should not be purchased 
D)$7,130,the machine should not be purchased

Quizplus · Accepted Answer

The present value of the machine can be calculated using the formula PV = C*[1-(1+r)^-n]/r, where C is the cash flow, r is the interest rate, and n is the number of years. Plugging in the numbers, we get PV = 3200*[1-(1+0.07)^-5]/0.07 = $13,120. Since the present value is greater than the cost of the machine, it is a good investment and should be purchased. Therefore, the answer is B.

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