Suppose a manager is deciding whether or not to purchase a piece of equipment to make an input internally and has completed the majority of the net present value (NPV)calculations. The manager has correctly calculated the NPV to be equal to: NPV = ($1.023 × Q)- $350,000, where Q is the annual quantity of the input the firm needs. If the firm needs 355,000 units of the input each year, the manager _______buy the equipment because the NPV is _ _______.
A)should not; positive
B)should not; negative
C)should; positive
D)should; negative

Question

Quizplus · Accepted Answer

Since the NPV equation provides a positive value (NPV>0), it indicates that the benefits (the present value of the expected cash inflows) outweigh the costs (the present value of the expected cash outflows) of buying the equipment. Therefore, the manager should purchase the equipment to make the input internally.

Suppose a Manager Is Deciding Whether or Not to Purchase