Use this information to answer the following question. You have the opportunity to purchase a machine for $10,000.After careful study of expected costs and revenues,you estimate that the machine will produce a net cash flow of $3,200 annually and will last 5 years.Based on an interest rate of 7 percent,determine the present value of the machine and if the machine should be purchased.
A)$13,120,the machine should not be purchased
B)$13,120,the machine should be purchased
C)$2,282,the machine should not be purchased
D)$7,130,the machine should not be purchased

Question

Use this information to answer the following question.  You have the opportunity to purchase a machine for $10,000.After careful study of expected costs and revenues,you estimate that the machine will produce a net cash flow of $3,200 annually and will last 5 years.Based on an interest rate of 7 percent,determine the present value of the machine and if the machine should be purchased.
A)$13,120,the machine should not be purchased 
B)$13,120,the machine should be purchased 
C)$2,282,the machine should not be purchased 
D)$7,130,the machine should not be purchased

Quizplus · Accepted Answer

To determine the present value of the machine, we can use the formula:

PV = CF / (1 + r)^n

where PV is the present value, CF is the net cash flow, r is the interest rate, and n is the number of years.

Plugging in the values given:

PV = 3200 / (1 + 0.07)^1 + 3200 / (1 + 0.07)^2 + 3200 / (1 + 0.07)^3 + 3200 / (1 + 0.07)^4 + 3200 / (1 + 0.07)^5
PV = 12,568.77

So the present value of the machine is $12,568.77. Since the cost of the machine is $10,000, it would be a good investment to purchase the machine. Therefore, the answer is B.

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