The Ziggy Trim and Cut Company Can Purchase Equipment on Sale

question 27

Essay

The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300. The asset has a three-year life, will produce a cash flow of $1,200 in the first and second year, and $3,000 in the third year. The interest rate is 12%. Calculate the project's payback assuming end of year cash flows. Also, calculate project's IRR. Should the project be taken? Check your answer by computing the project's NPV.

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Definitions:

Surplus

A situation where the quantity of a good or service supplied exceeds the quantity demanded at the current price.

Equilibrium Quantity

The quantity of goods or services that is supplied and demanded at the equilibrium price, where the quantity supplied equals the quantity demanded.

Equilibrium Price

The market price at which the supply of an item matches its demand, leading to a stable market where there is no surplus or shortage.

Adam Smith

An 18th-century Scottish economist and philosopher, often considered the father of modern economics, best known for his work "The Wealth of Nations" which promotes the idea of free markets and the invisible hand guiding economic activity.