Question

Beloit Co. is a manufacturer of mini-doughnut machine makers. Early in 2015 a customer asked Beloit to quote a price for a custom-designed doughnut machine to be delivered by the end of 2015. Once purchased, the customer intends to place the machine in service in January 2016 and will use it for four years. The expected annual operating net cash flow is estimated to be $120,000. The expected salvage value of the equipment at the end of four years is about 10% of the initial purchase price. To expect a 15% required rate of return on investment, what would be the maximum amount that should be spent on purchasing the doughnut machine

Answer 1

Answer:

$363,375.20

Explanation:

initial outlay = X

useful life = 4 years

salvage value = 0.1X

NCF years 1 - 4 = $120,000

discount rate = 15%

NPV = 0

X = $120,000/1.15 + $120,000/1.15² + $120,000/1.15³ + ($120,000 + 0.1X)/1.15⁴ =

X = $104,347.83 + $90,737.24 + $78,901.95 + $68,610.39 + 0.05718X

X = $342,597.41 + 0.05718X

0.94282X = $342,597.41

X = $342,597.41 / 0.94282 = $363,375.20