Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. The discount rate is 12%. Assume the equipment would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Dobson should purchase the machine.
What will be an ideal response?
Dobson Construction should buy the machine.
| Present value of cash outflows | $75,000 |
| Annual cash flows ? $15,000 × 4.96764 (Table 4; n = 8; i = 12%) | $74,515 |
| Residual value ? $5,000 × 0.40388 (Table 2; n = 8; i = 12%) | 2,019 | 76,534 |
| Positive present value of net cash flows | $ 1,534 |
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