Scenario 15.4: Consider the Following Information

question 101

Multiple Choice

Scenario 15.4:
Consider the following information:
You are considering buying a refrigerator. A new model would lower your electricity bills from $1200 per year to $1000 per year, because your current refrigerator is very inefficient. The refrigerator you want sells for $800, and you expect it to last for 10 years. The interest rate is 6%.
-Refer to Scenario 15.4. The net present value of the purchase is:

• A) $200 × 10 - $800.
• B) $200/1.06 - $800.
• C) $200/1.06¹⁰ - $800.
• D) $200 × (1 + 1/1.06 + 1/1.06² + ... + 1/1.06⁹) - $800.
• E) $200 / (1 + 1/1.06 + 1/1.06² + ... + 1/1.06⁹) - $800.

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Definitions:

Current Assets

Assets that a company expects to convert to cash, sell, or consume within one year or its operating cycle, whichever is longer.

Fixed Assets

Long-term tangible assets used in a company's operations that are not expected to be converted into cash within a year.

Current Liabilities

Short-term financial obligations that are due within a year or within the normal operating cycle of a business.

Indirect Method

A cash flow statement presentation method that adjusts net income for changes in balance sheet accounts to calculate cash flow from operating activities.