The Management of Dakota Corporation Is Considering the Purchase of a New

question 8

Multiple Choice

The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: $$\begin{array} { l l l } \text { Year } & \text { Income from } & \text { Net Cash } \\\text { Operations } & \text { Flow } \\1 & \$ 100,000 & \$ 180,000 \\2 & 40,000 & 120,000 \\3 & 20,000 & 100,000 \\4 & 10,000 & 90,000 \\5 & 10,000 & 90,000\end{array}$$ The present value index for this investment is

• A) 1.08
• B) 1.45
• C) 1.14
• D) 0.70

---

Definitions:

Effective Annual Rate

The interest rate on a loan or investment, adjusted for the effect of compounding over a one-year period.

Par

The face value of a bond or other financial instrument, which is the amount to be paid to the holder at maturity.

HPR

Holding Period Return, a measure of the total return received from holding an asset or portfolio of assets over a specified period of time.

Dividend

A portion of a company's earnings distributed to its shareholders, typically in the form of cash payments or additional shares.