Health Care Systems of the South is about to buy an expensive piece of diagnostic equipment. The company estimates that it will generate uniform revenues of $500,000 for each of the next eight years
What is the present value of this stream of earnings, at an interest rate of 6%? What is the net present value if the machine lasts only six years, not eight? If the equipment cost $2,750,000, should the company purchase it?
S = R × X = 500,000 × 6.210 = $3,105,000; S = R × X = 500,000 × 4.917 = $2,458,500
The company should purchase the equipment if it believes it will last eight years, but not if it fears that it will last only six.
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