Wiggins Company Is Considering Purchasing Equipment Wiggins Requires a Minimum Rate of Return of 11

question 161

Multiple Choice

Wiggins Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1, $50,000; Year 2, $90,000; Year 3, $130,000. Below is some of the time value of money information that Wiggins has compiled that might help them in their planning and compounded interest decisions. $$\begin{array} { | l | r | r | r | } \hline & 1 \text { period, } 11 \% & 2 \text { periods, } 11 \% & 3 \text { periods, } 11 \% \\\hline \text { Present value of 1 } & 0.90090 & 0.81162 & 0.73119 \\\hline \text { Future value of 1 } & 1.11000 & 1.23210 & 1.36763 \\\hline \text { Present value of an annuity of 1 } & 0.90090 & 1.71252 & 2.44371 \\\hline \text { Future value of an annuity of 1 } & 1.00000 & 2.12000 & 3.37440 \\\hline\end{array}$$ Wiggins requires a minimum rate of return of 11%. To the closest dollar, what is the maximum price Wiggins should pay for the equipment?

• A) $219,137
• B) $213,146
• C) $218,099
• D) $208,499

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Definitions:

Average Total Cost

The average cost of producing one unit, determined by dividing the total production expenses by the quantity of products made.

Fixed Cost

Expenses that do not change as a function of the activity of a business, within the relevant period.

Marginal Cost

The cost of producing one additional unit of a product.

Average Total Cost

The total cost divided by the quantity of output produced, indicating the average cost per unit of output.