A machine will generate after tax revenues of $1331 at the end of each year for 3 years,after which it will be worthless. (Its scrap value will only cover the cost of its removal). The interest rate available to the firm on risk-free bank accounts or bonds is 10 percent. The machine is a worthwhile investment if its purchase price is less than
A) $3,993.00
B) $4,846.17
C) $3,310.00
D) $4,392.30
E) $3,630.00

Question

Quizplus · Accepted Answer

To determine the maximum purchase price for the machine, we need to calculate the present value of the after-tax revenues for 3 years, discounted at the interest rate of 10%. We can use the formula for the present value of an annuity:

PV = C * (1 - 1/(1+r)^n) / r

where PV is the present value, C is the annual cash flow, r is the discount rate, and n is the number of years.

In this case, C = $1331, r = 10%, and n = 3. Plugging in the numbers, we get:

PV = 1331 * (1 - 1/(1+0.1)^3) / 0.1
PV = $3,310.00

Therefore, if the purchase price of the machine is less than $3,310.00, it will generate a positive net present value and be a worthwhile investment. Among the given choices, only option C) satisfies this condition, so it is the best choice.

A Machine Will Generate After Tax Revenues of $1331 at the End