Question

A financial manager is considering a proposal from her Chief Operating Officer (COO) to purchase precision testing equipment. The financial manager with the assistance of operations has estimated the cash flow benefits, namely the cost savings from fewer production defects, of the new equipment. The Present Value (PV) of the these positive cost savings over the next 10 years is estimated to be $455,000 based on the firm's cost of capital of 7%. Which of the following statements is true?
a. If the total cost of the equipment, including the costs of installation and set up, are equal to or less than the estimated PV of the cost savings $755,000, the financial manager should recommend the proposal to the COO and senior management.
b. If the total cost of the equipment, including the costs of installation and set up, are significantly greater than the estimated PV of the cost savings $755,000, the financial manager should recommend the proposal to the COO and senior management.
c. If the total cost of the equipment, including the costs of installation and set up, are significantly greater than the estimated PV of the cost savings $755,000, the financial manager should NOT recommend the proposal to the COO and senior management.
d. If the total cost of the equipment, including the costs of installation and set up, are equal to or less than the estimated PV of the cost savings $755,000, the financial manager should NOT recommend the proposal to the COO and senior management.

Answer 1

Answer:

c

Explanation:

Only a profitable investment would be accepted by a firm. this is because the aim of a firm is to earn profit

for a project to be accepted, the present value of cost savings has to be greater than the total amount invested in the project. Thus, the NPV of a project should be positive if it is to be accpeted

Net present value is the present value of after-tax cash flows from an investment less the amount invested.