Wiggins Company Is Considering Purchasing Equipment

question 71

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. 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:

Pretax Profits

Earnings of a company before income tax expense has been deducted.

Borrowing Rate

The interest rate charged by a lender to a borrower for the use of borrowed money, often expressed as an annual percentage.

ROA

Return on Assets, an indicator of how profitable a company is relative to its total assets, showing how efficient management is at using assets to generate earnings.

ROE

Return on Equity: It's a financial performance indicator that is computed by dividing the net income by the equity held by shareholders.