Milam Company requires a 12% return on all investments. How much will the company be willing to pay for machine A if the machine will pay $8000 per year for 10 years?

Question

Quizplus · Accepted Answer

To calculate the present value of the machine, we need to use the present value formula:

PV = C × [1 - (1 + r)-n] / r

Where PV is the present value (what Milam is willing to pay), C is the cash flow ($8000), r is the required rate of return (12%), and n is the number of years (10).

Plugging in the values, we get:

PV = $8000 × [1 - (1 + 0.12)-10] / 0.12
PV = $45,202

Therefore, Milam will be willing to pay $45,202 for machine A.

Milam Company Requires a 12% Return on All Investments