Question

Forge Company wants to purchase a new cutting machine for its sewing plant. The investment is expected to generate annual cash inflows of $120,000. The required rate of return is 10% and the current machine is expected to last for four years. What is the maximum dollar amount the company would be willing to spend for the machine, assuming its life is also four years

Answer 1

Answer:

$380,280

Explanation:

Calculation for the maximum dollar amount

Using this formula

Maximum dollar amount =Annual cash inflows*Present value Annual amount

Where

Annual cash inflows=$120,000

PV Annual 4 (10%)=3.169

Let plug in the formula

Maximum dollar amount=$120,000*3.169

Maximum dollar amount=$380,280

Therefore the maximum dollar amount the company would be willing to spend for the machine will be $380,280