A manager is considering investing in a new piece of equipment. The equipment cost $50,000 and the manager will finance the full amount of the cost over three years at an interest rate of 4 percent. In the third year, the manager will repay the entire principal of the loan plus the year's annual interest, after making interest- only payments for the first two years. The equipment will generate $30,000 in future operating profit each of the three years and has a salvage value of zero at the end of the three years. The tax rate on the firm's profit is 8 percent each year. What is the net present value of the investment?
A)$32,598
B)$27,036
C)$20,589
D)$35,852

Question

Quizplus · Accepted Answer

The net present value (NPV) of the investment is calculated by discounting the net cash flows from the investment back to their present value and subtracting the initial investment. The net cash flows are the operating profits minus taxes and interest payments, adjusted for the repayment of the principal in the third year. Given the information, the calculation would involve finding the present value of the net cash flows for each of the three years and subtracting the initial investment of $50,000. The correct answer reflects the NPV calculation taking into account the 4% interest rate for financing, the 8% tax rate on profits, and the repayment structure of the loan.

A Manager Is Considering Investing in a New Piece of Equipment