Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a desired rate of return of 12%,is the project acceptable? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)

Question

Quizplus · Accepted Answer

To determine whether the project is acceptable or not, we need to calculate the net present value (NPV) of the cash inflows. 
NPV = Present Value of Cash Inflows – Cost of Investment 
Using the PV of $1 table, we can find the present value factor for the annual cash inflows of $10,500 over 5 years at 12% discount rate. 
Present value factor = 3.6048 
NPV = $10,500 x 3.6048 – $36,000 = $7,142.40 
As NPV is positive, it means that the project will earn a rate of return greater than the desired rate of return of 12%. Therefore, the project is acceptable.

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