The manager of George Pty Ltd is planning to purchase equipment costing $5000. The equipment will reduce operating costs by approximately $2000 per year over its three-year life. The manager has decided to purchase the equipment because over the three years the company will save $1000. The major problem with the manager's analysis is that:

Question

Quizplus · Accepted Answer

The major problem with the manager's analysis is that they do not consider the time value of money. The $1000 in savings over three years is not adjusted for the cost of capital or the opportunity cost of the funds used to purchase the equipment. A proper analysis would involve calculating the present value of the savings using a appropriate discount rate.

The Manager of George Pty Ltd Is Planning to Purchase