Answer:
Interest rates and investment
If interest rates are increased then it will tend to discourage investment because investment has a higher opportunity cost. With higher rates, it is more expensive to borrow money from a bank. Saving money in a bank gives a higher rate of return.
Answer:
a) Find the attached jpeg file for the cash flow diagram
b) The company should purchase Device B.
Explanation:
a) Draw cash flow diagram for each option
A project cash flow diagram is a tool that is used to present a visual representation of the cost of a project and cash it is expected to generate over a specified period of time. On the diagram, x-axis represents the year, and y-axis represents cash out flows and/or inflows.
Note: See the attached jpeg for the cash flow diagram.
b) If interest rate is 7%, which device should your company purchase?
To determine this, we compare the Net Present Value (NPV) of the 2 devices.
Note: See the attached excel file for the calculation of the NPVs of the two devices.
From the attached excel file, we have:
NPV of Device A = $230
NPV of Device B = $262
Decision: Since $262 NPV of Device B is greater than the $230 NPV of Device A, <u>the company should purchase Device B.</u>
